Artificial intelligence (AI) is the most dominant investing theme in the market today. Given the technology's wide implications, it's not surprising that many stocks associated with the trend have been some of the best performers this year. However, one of the most vital (I would argue the most vital) has recently dipped, which could provide investors with a buying opportunity.
So what's this company that is arguably the most vital in all of AI? It's not Nvidia, but one of the companies that supplies a technology that makes its chips possible.
Today's AI doesn't happen without ASML
There are many technologies involved in making chips, but one company holds a technological monopoly on a vital process: ASML (ASML -0.08%). ASML's products give chip manufacturers the capability to perform the lithography process at a microscopic scale. Through its extreme ultraviolet (EUV) technology, manufacturers can create chips with electrical traces that are only a few nanometers apart.
ASML is the only company in the world that uses this technology, so if you want to make the most powerful and cutting-edge chips, you have to use ASML's machines. Consequentially, this makes ASML the most important company in the AI value chain, as the innovative GPUs that Nvidia creates wouldn't be possible without those machines.
Because ASML is further upstream than some of the end use cases for AI, it's not seeing the same demand that companies like Nvidia are, which is throwing investors off. This was evident in its second-quarter results when it posted net sales of 6.2 billion euros compared to 6.9 billion last year. This seems like a huge problem for many investors, as AI demand should be driving sales up, not down.
But this analysis isn't sound. Anyone who has been listening to ASML's quarterly conference calls knows that 2024 is a preparation year for 2025, which management has repeatedly stated will be a much stronger year. In fact, 2025 was mentioned nearly as many times in the Q2 conference call as 2024. Clearly, management wants investors to prepare for 2025 and just ignore what's going on in 2024.
Wall Street analyst projections also back up this sentiment, as they only expect 2% revenue growth in 2024 but 33% in 2025. After ASML's most recent sell-off, it's clear some investors may have forgotten about this, which is a prime opportunity to take advantage of now.
When using 2025 estimates, ASML doesn't look terribly expensive
Before reporting earnings, ASML traded for more than 50 times forward earnings -- a valuation that is very expensive but isn't very accurate because it doesn't include all of 2025's strong projections.
ASML PE Ratio (Forward) data by YCharts
To properly assess where ASML's stock is trading, we'll need to use 2025 earnings-per-share (EPS) estimates. Twenty analysts expect ASML to post $32.64 EPS in 2025. Dividing today's near-$900 stock price by that figure yields a valuation of 27 times 2025 earnings.
While that's not a fire-sale valuation by any measure, it is much more palatable than the 43 times forward earnings it trades at now. With the stock down more than 20% since ASML reported earnings, I think now may be a smart time to start initiating a position.
Investors have few opportunities to invest in true monopolies, and this is one of them. ASML is the sole provider of a vital technology for making cutting-edge chips. The demand for these chips will likely only increase, making ASML a smart investment.
