Now that some artificial intelligence (AI) stocks have become so popular, many investors may feel like they’ve missed the boat. However, one of the best ways to invest in AI just went on sale.
ASML (NASDAQ: ASML) has a technology that no one else has, giving it a technological monopoly status. Without their machines, chip companies wouldn’t be able to create the same advanced chips that push the boundaries of computing power. As a result, ASML is one of the most critical companies in the chip value chain, making it a major AI player.
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However, as mentioned earlier, ASML simply went up for sale due to a poorly received earnings report. Is this a buying opportunity? Or is there a good reason that the stock is down about 40% from its all-time high?
ASML’s machine does not follow the chip cycle exactly
ASML isn’t the cheapest stock on the market at $670 per share, but it’s still far from its all-time high of nearly $1,100. Given how critical ASML is of any company in the chip value chain, investors may be surprised if this company isn’t at its all-time high. After all, Nvidia (NASDAQ: NVDA) is selling more and more graphics processing units (GPUs) every quarter, which require a lot of chips Taiwanese semiconductor (NYSE: TSM) in a process that uses ASML machines.
The most important thing to remember about ASML, however, is that it does not directly align with the chip business cycle. Orders for ASML’s lithography machines are placed years in advance, so the capacity that is now being built for AI chips has already ended up on ASML’s books. Unfortunately for investors, this has led management to lower its 2025 expectations.
Management previously forecast between 30 billion and 40 billion euros for 2025. However, that expectation has been reduced to 30 billion to 35 billion euros – a move that the market did not appreciate. After this announcement, the stock fell by 20% in the following trading days.
This decline is due to China, which has become an outsized part of its business in recent years. In the third quarter, 47% of sales went to China, but by 2025 they expect this to account for around 20% of sales – a historically normal level. The business reduction is likely due to two factors (although management did not comment on the reason in the earnings release).
First, Western governments do not want China and its allies to get their hands on ASML’s most advanced machines, as this would allow them to produce the most technologically advanced chips available. Due to various export bans imposed by the Netherlands (ASML is based in the Netherlands) and the US, ASML is already limited in what it can sell to China, and more restrictions have recently been introduced.
Second, China is currently experiencing an economic downturn, which is obviously dampening industrial expansion. Both of these factors do ASML no favors, but these are fairly short-term headwinds.
However, management is still very optimistic about the future.
The future of ASML looks bright
While investors didn’t appreciate the lowered expectations thanks to China, long-term investors should heed this statement from ASML:
In summary, the longer-term trends are still very, very strong. Very, very positive, with good signs of upside. But the development of recent months and the customer-specific circumstances I mentioned have now led to a more gradual growth curve for our company.
In principle, ASML is still strong; it just won’t grow as fast as it once expected. The range given by management of 30 to 35 billion euros is still quite strong, considering where revenues are expected to come in in 2024. For 2024, management expects sales of 28 billion euros, so the target range for 2025 would indicate growth of 7.1% to 25%. If earnings come in at the lower end of expectations, I wouldn’t be surprised to see more investors flock to the exits, but if earnings come in at the higher end of expectations, ASML could see a sharp recovery.
Currently, the stock trades for 26 times 2025 earnings.
That’s not a bad price, considering ASML is in a class of its own and has no competition.
While the road may be bumpy for ASML in the coming year, it still looks like it will be smooth in the long run. An investment in ASML is a bet that we will need more chip capacity in the coming years. That’s about the most obvious prediction we see in the investment world, and ASML will be a big benefactor of this move.
Should you invest €1,000 in ASML now?
Consider the following before buying shares in ASML:
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Keithen Drury has positions in ASML and Taiwan Semiconductor Manufacturing. The Motley Fool holds positions in and recommends ASML, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
Do you have $1,000? A top artificial intelligence (AI) stock is currently on sale and was originally published by The Motley Fool
