ASML Stock: Buy The Oligopoly; Clear Leader In EUV (NASDAQ:ASML)

ASML headquarters in Silicon Valley

Sundry Photography/iStock Editorial via Getty Images

We are buy-rated on ASML (NASDAQ:ASML). Our bullish stance on the company is simple: we believe ASML is necessary for the semiconductor industry to operate. ASML creates lithography solutions which are the machines that cut wafers and essentially allow chipmakers to produce chips. ASML is the force driving Moore’s Law in the semiconductor industry. The company’s lithography machines allow for the shrinking of chips and, in turn, the production of smaller, faster, and cheaper chips. No matter how much the stock dips, we believe the company has a ticket back up because of its well-position in the litho-sphere and monopolizes the latest lithography technology, EUV.

We believe the company is currently in a downward draft because of semiconductor demand headwinds resulting from inflationary pressures and supply chain issues. The near-term outlook for ASML is not green, but we believe the company is a buy for the medium to the long-term investor.

ASML is well-positioned in the semiconductor food chain.

ASML’s primary business is lithography, or creating chip-making equipment. The company’s lithography solutions are either DUV or EUV. Both DUV and EUV help print chips used in semiconductor end-markets: Artificial Intelligence (AI), 5G, virtual reality, gaming, simulation, and visualization, among others. The lithography technology is necessary for the function of semiconductor markets. ASML is the leading supplier for significant chipmakers: Intel (INTC), Taiwan Semiconductor Manufacturing Company (TSM), and Samsung (OTC:SSNLF). TSMC alone has a 28% market share for 40nm and smaller nodes and for a total of about 54%, according to Counterpoint Research, and supplies chips for semiconductor giants AMD (AMD), NVIDIA (NVDA), and Apple (AAPL). The production of TSMC and, in turn, the production of these semiconductor giants relies on ASML’s machines. The same goes for Samsung, the leading semiconductor vendor by memory sales according to the IDC report, which saw a 31% year-over-year increase in revenue in 2021. ASML is the supplier that allows for the semiconductor industry’s healthy competition, advancement, and growth. The following graph shows the company’s role in the broader manufacturing of semiconductors.

Semiconductor supply chain

ASML earnings presentation

Global megatrends are driving growth in the semiconductor industry. According to the IDC, “worldwide semiconductor revenue is expected to reach $661 billion in 2022, a 13.7% year-over-year growth rate.” While in the near-term, ASML is not immune to chip slowdown, we believe that as long as the semiconductor industry grows, ASML will grow alongside it. We believe ASML is a gold mine for long-term investors.

ASML is outperforming the competition.

While ASML is not the only company with lithographic solutions, it holds the largest market share. ASML’s most significant competitors are Japanese companies Nikon (OTCPK:NINOF) and Canon (CAJ). Nevertheless, the Dutch firm’s market share in the lithography industry has more than doubled since 2005 to 62%.

The following graph shows the ASML stock performance versus the litho-sphere competition.

ASML Versus Nikon and Canon

YCharts

We believe ASML is an attractive long-term buy because it is in the lithography business and because it dominates that business

ASML’s secret sauce is its EUV lithography technology

The driver behind ASML’s large market share is its venture into EUV lithography. EUV lithography machines are the newer versions of DUV and essentially allow for the printing of smaller and smaller chips. EUV lithography uses light with a 13.5-nanometer wavelength, which is more than 14 times shorter than DUV light. EUV technology is a significant growth driver for ASML because the technology is unique to the company. The following graph shows the breakdown of ASML’s sales from each. The sales of EUV lithography systems are increasing year on year.

ASML business performance

ASML

By 2025, the company expects “about two-thirds of total system sales will be EUV, and the rest will be DUV.” We believe ASML is leading the future of technology because it enables the making of smaller chips. We believe the semiconductor industry will accelerate the adoption of EUV multi-patterning and newer forms of EUV. TSMC, Samsung, and Intel are already using ASML’s current EUV machines to make chips used in the latest crop of computers and smartphones. We believe investing in ASML is equivalent to investing in the semiconductor’s biggest chipmakers.

Stock Performance:

ASML stock has had an incredible run. The stock naturally skyrocketed in March 2020, with the pandemic increasing demand for semiconductors. The stock appreciated around 284% over the past five years compared to Nikon (TYO: 7731), down 9%, and Canon Inc (TYO: 7751), down 15% during the same time. YTD, the stock is down 36%. We believe the downward draft is not specific to ASML but is the result of wider market sell off. There will be more heartache in the next couple of quarters, but we believe the company is well-positioned to outperform in the long run. The following chart illustrates ASML’s performance and YTD over the last five years.

YTD ASML stock performance

YCharts

Chart
Data by YCharts

Valuation:

ASML is trading at around $485. The stock is expensive compared to its semiconductor peer group but has pulled back significantly (about 46%) from its 52-week high of $896. ASML is trading at 7.4x EV/C2023 sales. The stock is expensive compared to the peer group, trading at 4.2x EV/C2023. On a P/E basis, ASML is trading at 22.9x C2023 EPS of about $21 compared to the group average of 13.7x C2023 EPS. On a growth-adjusted basis, ASML is trading at 0.6x. We believe ASML’s stock is currently down because of the recent market sell-off. Nevertheless, we believe the stock is a growth pick in the long run and recommend investors buy the current dip. The following chart illustrates ASML’s peer group valuation.

Semiconductor valuation chart

Techstockpros & Refinitiv

Word on Wall Street:

Market consensus on ASML is an overwhelming buy, with 25 analysts having a buy rating on the stock, while five analysts are hold rated and two are sell rated. ASML is trading around $484. The median price target is $750 leaving room for a 55% upside. The mean price target is a bit higher at $775, allowing for a 60% upside.

Sell-side ratings & Price Targets

Techstockpros & Refinitiv

What to do with the stock:

ASML is expensive, but it is much cheaper than it was and YTD the stock is down some 39%. We believe the semiconductor industry is growing, and ASML is creating the machines that enable that growth. In turn, we recommend the stock as a favorable risk-reward situation for long-term investors.

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