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Why ASML Holding Shares Rose 63% in 2021

Motley Fool - Tue Jan 11, 11:58PM CST

What happened

Shares of ASML Holding(NASDAQ: ASML) gained 63.2% last year, according to data from S&P Global Market Intelligence. The maker of lithography systems that are used for manufacturing semiconductor chips is among the handful of companies that benefit from the long-running shortage of chipmaking facilities around the world.

So what

If you're making computer chips, your clean room probably has some of ASML's lithography machines installed. The company is not only a market leader in this field, but also stands alone on the leading edge of advanced lithography systems. So when Taiwan Semiconductor Manufacturing(NYSE: TSM) is investing billions of dollars in next-generation manufacturing facilities and Intel(NASDAQ: INTC) is entering the chip foundry market along with another massive infrastructure boost, ASML is definitely reaping plenty of system orders from those factory-building ambitions.

The company dug into that opportunity in 2021. Sales added up to $6 billion dollars in the first three quarters of the year, a 40% constant-currency increase over the same period of 2020. Earnings soared 90% higher over the same period. At the same time, ASML has a backlog of unfilled system orders worth $21.8 billion, which works out to a 172% year-over-year increase.

Photo of a chipmaker's clean room, full of machines and devoid of people.

Image source: Getty Images.

Now what

ASML is enjoying a golden age right now, and the back-ordered systems should keep the revenue streams flowing for at least a couple of years. The company is making the most of these rare market conditions.

However, market makers have already baked most of the good news into ASML's stock price. Shares are trading at 49 times trailing earnings and 14 times sales -- valuation ratios typically seen in skyrocketing software start-ups.

The company also had some bad luck on Jan 3, 2022, as a fire disrupted operations in ASML's Berlin factory. Smoke and fire damage shut down several manufacturing lines for a few days. The company is still evaluating the impact of this event, but the Berlin plant is getting back in action already.

This richly valued stock is not every investor's cup of molten silicon crystals. Value investors may want to give ASML's red-hot stock a chance to cool down before taking action. In particular, the stock might take a dive when management reports the Berlin incident's final impact. Expect that update to arrive as a part of ASML's fourth-quarter earnings report on Jan. 19.

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Anders Bylund owns Intel. The Motley Fool owns and recommends ASML Holding, Intel, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: long January 2023 $57.50 calls on Intel and short January 2023 $57.50 puts on Intel. The Motley Fool has a disclosure policy.