Over the past 10 years, semiconductor equipment manufacturer ASML (ASML +6.10%) has been a massive winner, producing a total return of 761% vs. 270% for the S&P 500. But this has been a tough month. Since the company's latest earnings report in mid-October, the stock has dropped 18% -- a reaction to both results and guidance that fell below analysts' expectations.
The post-earnings drop erased almost a year's worth of gains for ASML, returning the share price to where it was in early 2024. The question investors are asking is if this presents a buying opportunity, or if the market's reaction is warranted, considering the financial picture moving forward.
Let's see if ASML is a buy before the stock price recovers.
NASDAQ: ASML
Key Data Points
An indispensable link in the semiconductor supply chain
Semiconductors have been top of mind for investors over the past few years, as the rush toward artificial intelligence (AI) has injected billions of dollars of capital into developing the most leading-edge chips that can power the large language models behind AI chatbots like ChatGPT. While companies like Nvidia have gotten the most headlines, ASML makes the entire chip manufacturing process possible.
To oversimplify, ASML makes the machines that make the chips. When it comes to cutting-edge chip manufacturing, ASML is the only company in the world that makes the extreme ultraviolet lithography machines necessary to make the chips that power the most advanced technology.
Long-term trend or short-term challenge?
The headline results for ASML's third quarter of 2024 were not bad. Year over year, revenue grew by 12% and exceeded the company's guidance, while earnings per share increased by 10%. However, net bookings only increased by 1% to 2.6 billion euros. ASML doesn't provide guidance for bookings, but analysts who cover the company were expecting 5.6 billion euros. Whenever there's that large of a discrepancy between expectations and reality, the stock will often pay the price.
Bookings is an important metric for ASML because it captures all sales for which written authorization has been received. Essentially, it accounts for current revenue, plus revenue it can expect in the future. Management spoke about this on the earnings call, pointing out that market conditions include a customer who is still cautious and slower to make buying decisions. The company expected that 2025 would be the year when they would return to growth, but it now appears that some of the challenges ASML faces will continue into next year.
Investors' patience is wearing thin
The stock reaction would indicate that investors are less willing to wait for this return to growth than they may have been a few weeks ago. However, some context is worth mentioning. At ASML's 2022 investor day, it forecast revenue for 2025 of between 30 billion euros and 40 billion euros. The company now expects that to be in the low end of the range, between 30 billion and 35 billion euros.
Even with slower-than-expected recovery for its customers, revenue in 2025 should still be within a range predicted almost two years ago. This indicates management has pretty good clarity into its business results several years in advance. This is worth keeping an eye on over the next few quarters. If 2025 revenue guidance gets revised down again, it could mean an even longer delay for a return to growth and could lead to another share price fall.
Is ASML a buy?
Long term, it's hard to argue that ASML won't be a more valuable company in the future than it is today. That said, the semiconductor industry is cyclical, so periods where the share price falls should be expected by investors.
Even after the post-earnings decline, ASML's stock still trades for a price-to-earnings (P/E) ratio of 38, which does not appear to be cheap. However, consider where today's valuation compares to the longer-term median P/E ratio.
ASML PE Ratio data by YCharts
The case could be made that, historically, ASML shares are cheaper than they've been in a while. On the other hand, there's enough uncertainty in the coming quarters that it's possible even more attractive buying opportunities could be on the horizon.
Adding to or starting a position at today's price could make sense, but I think ASML is the kind of stock to add to opportunistically over time, as short-term challenges present compelling valuations.
