This company is essential to the future of artificial intelligence, but it’s not eligible for the S&P 500.
One of the best ways to invest in the stock market is to buy an S&P 500 index fund. Buying an index fund ensures a diversified portfolio, so you’re sure to own at least a small piece of the biggest winners in the market. And since just a handful of companies drive the majority of total returns for the index each year, it’s imperative that you own shares in those companies to produce good returns.
The biggest winners in the stock market over the past two years have been artificial intelligence (AI) stocks. Companies like Nvidia, Apple, and Meta have been some of the largest contributors to the S&P 500’s returns in 2024. If you own an S&P 500 index fund, you own a good amount of each of those mega-cap stocks.
However, the S&P 500 doesn’t include every company benefiting from increased spending on artificial intelligence. The index only includes consistently profitable U.S.-based companies. As a result, investors focused exclusively on an S&P 500 index fund can miss out on some of the biggest winners.
Since there aren’t any non-U.S. companies in the S&P 500, index investors may be missing out on a tremendous company that’s instrumental to the advancement in AI. Dutch company ASML (ASML 2.18%) doesn’t qualify for the S&P 500, but investors shouldn’t overlook the semiconductor stock. The good news is that it’s not too late to buy shares.
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Essential machinery for the AI boom
ASML doesn’t make semiconductors itself. Instead, it provides key machinery that allows foundries to make the most of its limited resources. ASML sells semiconductor lithography machines, specifically deep ultraviolet (DUV) and extreme ultraviolet (EUV) machines. These machines allow foundries to print chip patterns on silicon wafers with low error rates.
ASML is the only company producing EUV machines, which are necessary for printing the most advanced AI chips. As big tech companies build out massive data centers focused on training and running generative AI models, they have numerous constraints to consider. Two of the biggest are space and energy consumption. More efficient chips solve that problem, but creating the most powerful and power-efficient chips requires ASML’s machines.
The long-term outlook for the company is extremely strong. Management expects semiconductor sales for data centers to grow to $350 billion by 2030 on the back of increased investment in AI. Overall semiconductor sales could top $1 trillion that year. That represents 9% average annual growth through the end of the decade.
Importantly, ASML should grow even faster than the overall semiconductor market. That’s mainly because there’s no real competitor for its machines. Additionally, its established relationships with the largest foundries in the world are unlikely to change. It takes years of lead time to plan for a new machine, and existing machines have a lifespan of 20 to 30 years, so ASML’s presence in the top foundry facilities is likely to remain a constant for the foreseeable future.
On top of that, ASML’s EUV machines are more complex than its DUV machines. As a result, ASML will likely generate more revenue from servicing its machines going forward. That could also lead to higher gross margins over the long run.
One of the best values in artificial intelligence
ASML has been beaten down in the second half of 2024, as it takes longer to recover from the sales slowdown in the back half of 2022. Management narrowed its 2025 revenue guidance to between 30 billion euros and 35 billion euros ($31.1 billion to $36.3 billion), which is the bottom half of its previous expectations provided during its 2022 analyst day. It also lowered its gross margin expectations for next year to between 51% to 53%.
Investors willing to look at ASML’s long-term potential could have an absolute bargain on their hands. As mentioned, ASML should outpace the 9% growth in semiconductor spending due to its strong competitive position. Low double-digit revenue growth, combined with strong operating leverage from increased EUV sales and service revenue, should lead to considerable growth in operating profits over the next half-decade.
Management forecasts 22.1 billion euros ($22.9 billion) in operating income at the midpoint of its 2030 outlook. That’s up from 8.8 billion euros ($9.1 billion) this year. That’s an average compound annual growth rate of about 17% through the end of the decade.
Shares currently trade for around 30 times analysts’ consensus 2025 earnings estimate. That price appears high due to the low expectations for 2025. But investors who see the long-term potential for ASML, as semiconductor sales expand over the rest of the decade, see the real value of the stock as much higher.
If you’ve stuck with an S&P 500 index fund, you might consider adding a small amount of ASML. If it were part of the index, it would have a weighting of about 0.5%. That may be a good place to start.
Even if you aren’t an index investor, ASML may be worth a closer look. It could be a great addition to any portfolio.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Adam Levy has positions in Apple and Meta Platforms. The Motley Fool has positions in and recommends ASML, Apple, Meta Platforms, and Nvidia. The Motley Fool has a disclosure policy.
