There’s a lot to be said for buying a great company going through a sticky patch and there’s no doubt, in our minds, that ASML (ASML:AMS) ticks both boxes. Crucially, we firmly believe the latter state of affairs is transitory and that now a great time to add this excellent technology company to your portfolio.
Dutch firm ASML is a big deal in the chips space. The advanced lithography machines it makes cost a fortune and are crucial in semiconductor manufacturing. Put bluntly, it is the only company in the world capable of manufacturing the EUV (extreme ultraviolet) tools needed for printing bleeding edge, complex semiconductor chips, and that gives it a unique place in the complex AI (artificial intelligence) and wider semiconductors ecosystem.
ASML’s giant machines, arguably the most important piece of equipment used by companies like Taiwan Semiconductor Manufacturing (2330:TPE), Samsung Electronics (005930:KRX) and Intel (INTC:NASDAQ), take months to build, install and qualify for production in chip foundries that cost tens of billions of dollars to build and run.
The operators of these facilities know that they need to be running that gear flat out, 24 hours a day, to give themselves a chance of making a return on the massive upfront investment, and that means customers place orders with ASML typically when they’re confident that they’ll have enough demand to keep the machines busy as long as a year in the future, an element of crystal ball gazing that leads to miscalculations.
DEMAND NOT COMING THROUGH AS HOPED
Evidently, some customers are not yet seeing the recovery they had hoped, so ASML orders have been sliding to the right, while operational issues at both Samsung and Intel are adding extra uncertainty to the mix.
What ASML said was that demand in some parts of the semiconductors ecosystem are soft – areas such as consumer electronics, smartphones and automotive. This was not new news. Companies like Apple (AAPL:NASDAQ) have experienced tougher market conditions for smartphone sales and the electric vehicle industry is growing at a slower rate than expected, but this has been evident for months.
Even so, the scale of the bookings (a predictor of future revenue) undershoot was ugly, with €2.6 billion in the third quarter nowhere near the €5.39 billion average of analysts’ estimates. Hence the sharp share price drop since the announcement.
Importantly, Bank of America analysts said ASML’s earnings ‘point to a sector divergence between robust AI demand and weak non-AI demand’.
The AI chip market is set to grow 99% in 2024 and another 74% next year. Meanwhile, the semiconductor market overall is projected to grow 18% this year and 12% in 2025, according to consulting firm International Business Strategies, which tracks industry data. IBS data shows the AI chip market – also known as the accelerator chip market – outpacing the sector at large through 2030.
Berenberg analysts recently noted that foundry firms cannot afford to halt developing their ‘leading-edge generation technology, as this capability is essential for them to remain relevant in the foundry market’.
Geopolitics is another potential pinch point for ASML, where US and European regulators are restricting the sale of its latest kit to places like China as the west tries to limit other nations’ scope to gain an advantage in AI and machine learning, but that’s unlikely to lead to bans on Chinese foundries buying legacy lithography tools in the future.
SHARES ARE LOOKING CHEAP
Investors should consider that while ASML forecasts have been reduced for 2025 and 2026 (Berenberg lowered its earnings per share estimates by around 13% on a 6% revenue reduction for both years), it now means the stock can be bought for a price earnings multiple of around 27, a level seen only a handful of times since 2019.
Berenberg calculates a base case PE of 35 for the company long-term, which implies a valuation of more than 950p on 2026 estimates. Considering ASML has a long history of operating margins and returns on capital of 30% to 35%, we think this is a great time to invest in a great company at a great price.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
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