ASML (ASML -0.08%) may be the best artificial intelligence (AI) company you've never heard of. However, without ASML, none of the amazing and innovative technology that surrounds us would be possible.
ASML is the sole provider of vital equipment in the chip-making process, making it a technological monopoly. This makes ASML an intriguing investment by itself, but does the rest of the company's picture represent a strong buy?
ASML's machines are critical
ASML's extreme ultraviolet (EUV) lithography machines are unique. These machines are vital in laying out microscopic traces on a semiconductor wafer, especially at the nanometer level. Almost every company that makes cutting-edge chips is an ASML customer, including Taiwan Semiconductor and Intel.
Image of ASML Lithography machine. Image source: ASML.
These chip fabricators' products find their way onto Apple iPhones or Nvidia graphics processing units (GPUs). But without ASML's machines, this wouldn't be possible. This makes ASML an absolutely critical company in the supply chain, but it also introduces unique issues.
Because ASML's home country of the Netherlands (alongside the U.S.) doesn't want these advanced machines to fall into the hands of China, some of ASML's products have export bans on them to some countries. This reduces the maximum revenue it can generate, but China is still a large customer of ASML, because less advanced machines have fewer restrictions. In the first and second quarters, nearly half of ASML's sales came from China, with South Korea being the second-largest customer.
However, this can also change from quarter to quarter, as ASML's business is quite lumpy. In Q2, ASML sold 89 new lithography machines and 11 used ones for a total of 4.76 billion euros. Including ongoing machine management sales, ASML generated 6.24 billion euros (about $6.97 billion) of total revenue. However, that's a decline from 2023's Q2 total sales of 6.9 billion euros.
If the chip demand caused by AI is so big, why are ASML's sales shrinking? Orders are placed for ASML machines years in advance. If you rewind to early 2023, the market had a chip surplus, so more manufacturing capacity wasn't needed. As a result, ASML's sales are struggling. However, management has been clear in telling investors that 2024 will be a down year, but 2025 is expected to be the company's best yet.
So, when evaluating whether ASML is a buy, you must keep in mind that 2024's metrics will be quite poor.
Current valuation metrics don't do ASML any justice
The stock looks pricey if you look at ASML's forward price-to-earnings (P/E) ratio or trailing (P/E).
ASML PE Ratio data by YCharts. PE = price to earnings.
That price puts ASML stock at around the same level as Nvidia's. However, Nvidia is growing like a weed, while ASML is shrinking for now.
Yet, as mentioned above, I think investors are better suited to use 2023's trailing results or full-year 2025 earnings. If you do, you get this valuation:
| Year | EPS | P/E Ratio |
|---|---|---|
| 2023 (trailing) | $21.55 | 42.1 |
| 2025 (projection) | $33.44 | 27.1 |
Source: YCharts and Yahoo! Finance. EPS = earnings per share. P/E = price to earnings.
That doesn't make the stock look nearly as expensive as current metrics. If you can keep that in mind, ASML's stock doesn't look costly at all. With the stock down nearly 20% off its all-time high, now might be an excellent time to start a position or add to an existing holding. None of this innovative technology happens without ASML, and with huge growth ahead for the chip industry, ASML is poised to shine.
