ASML (ASML -1.28%) is known as a leader in the semiconductor industry. The company is the only maker of extreme ultraviolet (EUV) lithography machines are critical to the chipmaking process.
However, that competitive advantage hasn’t helped the stock much this year. While peers like Taiwan Semiconductor Manufacturing have soared this year, ASML has gotten left behind in the artificial intelligence (AI) boom. Year to date through Dec. 16, the stock is down 5%, badly underperforming the S&P 500 and the broader chip sector.
The chart below shows the comparison.
However, a pullback can often set up a buying opportunity. So is ASML a buy today? Let’s take a look.
Where ASML stands now
The sell-off in ASML stock is understandable. The company disappointed investors in its third-quarter earnings report as it cut its guidance for 2025. That was due to weak demand in China following an earlier boom due to an order backlog. The company expects China revenue to normalize to about 20% of total revenue in 2025, down from close to 50% in 2024.
ASML’s business is highly cyclical as the company makes very expensive machines and it only sells about 100 of them every quarter. That means a downturn or delay in the industry can have significant effects on its results.
In addition to the slowdown in China, the company is also being affected by export restrictions from the U.S. on sending advanced technology to China. It disappointed investors with weak booking results, as it only booked 2.6 billion euros’ worth of new orders. That could be a warning about future demand.
Image source: Getty Images.
Despite those headwinds, the company has returned to year-over-year growth, with revenue up 12% in Q3 to 7.47 billion euros. Earnings per share also moved up from 4.81 to 5.28 euros.
While ASML’s core business may be beholden to the cyclical nature of the semiconductor industry, the company’s EUV technology gives it a significant advantage. ASML is the world’s only maker of EUV lithography machines, the next iteration of the deep ultraviolet (DUV) machines that handle most semiconductor production today.
However, EUV machines allow for the production of the advanced chips that are becoming more popular in the AI era, and that trend should only continue. Furthermore, the company is set to benefit from the boom in new semiconductor foundries, driven by AI, the CHIPS Act, and the need to geographically diversify away from Taiwan.
ASML now expects revenue of 30 billion to 35 billion euros in 2025 and 44 billion to 60 billion euros in 2030. The company continues to see significant opportunity in AI, noting that global semiconductor sales are expected to top $1 trillion by 2030. That implies 9% compound annual growth.
Meanwhile, the company is likely to remain the only maker of EUV machines. It has a technological lead over its competitors, and the research and development and manufacturing would cost billions and could be cost-prohibitive.
Is ASML a buy?
After disappointing investors by cutting its guidance for 2025, ASML seems to have relatively little downside at its current price point.
The stock trades at a price-to-earnings ratio of 39, which isn’t cheap, but margins look set to expand next year based on its guidance. The company is forecasting a gross margin of 51% to 53% next year and 56% to 60% by 2030 as EUV machines represent more of its business.
Finally, ASML expects double-digit EUV lithography growth annually through 2030, which should make the stock a winner at the current valuation.
2024 has been a forgettable year for ASML, but the business’ competitive advantages look durable. It should benefit from the growth of AI, expansion of foundries, and broader growth in the semiconductor industry. The stock looks like a smart buy at the current valuation.
Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
