Shares of top lithography equipment maker ASML Holding (NASDAQ: ASML) took a steep tumble after earnings in mid-April, halving what was a heady 30% run-up in the first few months of 2024. ASML is still sporting big gains so far during the new bull market, but some investors are nevertheless suddenly concerned about the company's financial outlook.
ASML is the sole provider of EUV (extreme ultraviolet) lithography equipment used in advanced semiconductor manufacturing -- used for high-end smartphones and, of course, in chips used in artificial intelligence (AI) systems. Given this position of strength, how could ASML possibly be having anything but a banner year? Is it time to buy the dip?
The march toward even more high-performance chips
In the final weeks of 2023 and the first quarter of 2024, all eyes had turned to ASML and the delivery of its newest and greatest EUV lithography machine to Intel (NASDAQ: INTC). There's a great deal of optimism that ASML will be a huge winner from the manufacturing supremacy race heating up between Intel, the current leader (both technologically and by revenue) Taiwan Semiconductor Manufacturing (NYSE: TSM), and Samsung, as well as memory chipmakers like Micron Technology (NASDAQ: MU) that are also expected to adopt more EUV lithography in the coming years.
While it is true that semiconductor manufacturing is incredibly important to the global economy right now, the industry has actually downshifted in order to ramp up to more production later on. Chipmakers have actually scaled back their purchase of new equipment, including of ASML's lithography machines, and are trying to get by with what they have until higher sales kick in later this year.
What that means for ASML is that 2024 is going to be a "transition year" -- that's a nice-sounding way of saying there may be lackluster financial results. ASML management has actually been saying this for months, and reiterated this outlook for no growth in revenue this year compared to 2023.
It stands to follow that, factoring in what management has also said will be slightly lower profit margins on lithography machines sold, ASML earnings will also be mostly flat in 2024. That's reflected in the stock trading for 43 times the current year expected earnings, based on Wall Street analysts' consensus estimates. That compares to ASML trading for roughly the same multiple, 44 times the last 12 months of reported earnings.
Given that little to no growth is expected in the coming quarters, a valuation of over 40 times earnings looks expensive.
When is ASML stock a buy?
Though investors have sold off ASML as of late, this may simply be a temporary reality check more than any indication of weakness. After all, back in November 2022, the company provided a forecast for revenue to reach a range of 30 billion euros to 40 billion euros ($31.9 billion to $42.5 billion, using exchange rates on April 22, 2024) in 2025. That outlook remains unchanged, and the midpoint of the outlook is significantly higher than the €28.3 billion in sales (or $30.2 billion) reported in the last 12-month stretch.
What's going on?
As chipmakers like Intel, Taiwan Semi, and others ramp up production of their next-gen chips -- including for newer generations of AI systems -- adoption of more ASML lithography equipment is expected. ASML's newest EUV machines can cost upwards of €300 million (about $320 million) or more each, so the company has to coordinate closely with its customers on the development of advanced chips. As a result, ASML has a high level of insight into its future revenue pipeline as a result.
Of course, the company still needs to prove it when 2025 finally arrives. Overpaying for growth before it's clear that expected growth can indeed be delivered isn't a great idea. Thus, the recent stock sell-off. Nevertheless, if management is correct, next year could be an especially good one for ASML. Investors who want in on the action now might consider buying the dip, taking advantage of lower stock prices to build a larger holding during the 2024 "transition year."
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Nicholas Rossolillo and his clients have positions in ASML and Micron Technology. The Motley Fool has positions in and recommends ASML and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.
