Investors need to keep a list of top stocks they want to buy but may not have purchased yet due to high valuations. One of those companies is ASML Holding (ASML 0.75%), and it's one of those that I have always wanted to own, but it got away from me. The point of these lists is to keep them on your radar; if the stock price falls, you can pick up shares (if the opportunity is right).
ASML recently tumbled more than 20% after reporting earnings and is now nearly 40% off its all-time high. While I saw this as a buying opportunity, others saw it as a sell sign. Understanding why the other side is selling can help you determine whether now is a good time to buy the stock or not.
Government restrictions are putting a damper on ASML's growth
ASML is probably one of the world's most critical companies, yet few know about it. ASML makes lithography machines for chip manufacturers. These machines lay out the microscopic traces on chips that are spaced as little as 3 nanometers (nm) apart on chips. For reference, a human hair is about 80,000 to 100,000 nm wide.
Nobody else has the technology that ASML does, so it is essentially a technological monopoly. While this hasn't run ASML into regulatory issues yet, it has run into export issues. Western governments don't want these machines falling into the hands of China or its allies, so they've placed bans on selling its most high-tech machines to China. However, ASML still sells some of its less advanced machines to them, although some of the installed bases in China can't be serviced anymore because the Dutch government (ASML is headquartered in the Netherlands) is aligning its policy with the U.S. to ensure these technologies can't be used by the Chinese.
This is a problem for ASML, as about half of its Q3 sales were to China. However, this is an abnormally large chunk of its business, and management expects China's contribution to its overall business to go back to a normal level in 2025.
Still, because ASML isn't allowed to sell to whomever it wants to, its financials are starting to be impacted. Originally, ASML forecast 2025 revenue between 30 and 40 billion euros. However, it decreased that range to 30 billion to 35 billion euros during its Q3 conference call. This concerned investors and sent the stock tumbling after earnings.
I used this opportunity to scoop up some shares, as I don't think it's as bad as some people think.
ASML's stock is still expensive after the drop
While it was disappointing to see the revenue guidance decrease, the range management provided still projects growth in 2025. Management expects 28 billion euros in revenue for 2024, so the range management provided for 2025 projects between 7% and 25% growth.
That's not a bad year for most companies, and I think management is likely setting lower expectations now so they can change the narrative when revenue comes in on the top end of the range (remember, 35 billion euros was the midpoint of the old guidance). I also wouldn't be surprised if ASML gave stronger 2026 guidance during its investor day on Nov. 14, as management was fairly adamant about expanding on its outlook during that event, not the earnings call.
Still, I'm OK with the current revenue outlook, especially after the drastic stock drop. If you're looking to get into ASML stock, it's still trading in the same range it was right after the drop, as the stock hasn't bounced back yet.
ASML PE Ratio data by YCharts
With the shares trading at 33 times forward earnings, it's not a cheap stock, which means it was very expensive prior to its drop (which is why I avoided it). However, that valuation is fairly consistent with other big tech companies growing at about the same pace as ASML, so I'm fine with paying that still-expensive price tag. Because ASML has a technological monopoly, I'm even more confident the company can succeed over the long term.
An investment in ASML is a bet that we will need more advanced chips and a larger quantity of them in the future. I think that's a pretty safe bet, which makes ASML a great buy now if you have a long-term investing horizon (more than five years).
