Bargains in both the artificial intelligence (AI) and chip sectors are hard to come by. Investor enthusiasm in this area has been high for nearly two years, and the results have paid off well.
However, one of the most important companies in both spaces is now down around 40% from its all-time high, and it looks like a good value at these levels. So what's this company that's so vital in both spaces?
It's Netherlands-based ASML (ASML -4.26%). Let's learn more.
Nobody else has ASML's technological capabilities
ASML is one of those companies that few have heard of, but nearly everyone is affected by. ASML makes lithography machines used by chip manufacturers to lay the electrical trace on a silicon wafer. This requires incredibly specialized technology, as the current cutting-edge chip design only has 3 nanometers (nm) between each trace. For reference, the average human hair is between 80,000 and 100,000 nm wide.
Not only are ASML's machines the top dog in this space, they are the only dog in this space. ASML has a technological monopoly in this sector, with no other company offering the product it does. This places ASML in a unique position, as it's a company that all chip manufacturers must do business with if they want to compete at the high end of the market.
NASDAQ: ASML
Key Data Points
However, being the only one in this space also has some drawbacks. It's far easier to control the supply of a product if there's only one source, and that's exactly what the Netherlands and U.S. governments have done. Both countries don't want ASML's machines to fall into the hands of China or its allies, so these two have restricted what ASML can sell and service in China.
Additionally, the Netherlands recently decided not to renew a servicing license for some machines already in China, so existing machines cannot be serviced. These bans are starting to have a significant effect on ASML's business and are what has caused the stock price to tumble.
In 2025, management originally expected revenue between 30 billion and 40 billion euros. In its most recent update, it reduced that range from 30 billion to 35 billion euros, citing the effects of a slowing China business. This is a problem because China made up around 50% of revenue in Q3.
In 2025, ASML expects China's revenue to come in at around 20% of its total, which is a more historically normal level. Regardless, investors didn't like the revenue guide down, especially when the chip sector appeared to be booming, thanks to huge AI demand.
ASML's stock has returned to a reasonable valuation level
However, I don't think that's the right way to look at this, as ASML could still be a phenomenal investment. The problem with ASML's stock was that it was valued like there would be no bumps in the road. Prior to its fall, it traded for over 50 times forward earnings. That kind of valuation means a company must be perfect. For reasons ASML cannot control, it wasn't perfect, and the stock tumbled as a result.
ASML PE Ratio (Forward) data by YCharts
Now, investors need to reevaluate the stock at 33 times forward earnings. I think this is a fair price to pay for ASML for several reasons.
First, ASML's management is still bullish on its long-term growth trajectory. It recently held an investor day where it gave guidance for where it believes the business will be by 2030. By then, it expects revenue between 44 billion and 60 billion euros, which would indicate a compound annual growth rate from 2024's guidance between 7.8% and 13.5%. With ASML's solid history of dividends and share repurchases, this should easily push its earnings per share growth above the 10% range, which indicates solid potential for the stock to beat the market over the long term.
Second, ASML's unique technology isn't at risk of being disrupted because no one else is doing anything close to what it's doing. Finally, over the past five years, ASML's average trailing price-to-earnings (P/E) ratio was 43. Today, it's 35. So, you have the opportunity to purchase a top company in its industry for a discount to its historical valuation.
All of these reasons add up to ASML being a fantastic long-term investment, but you'll just have to be patient to see the returns that ASML provides.
