ASML Holding (ASML) is a global innovation leader in the chip industry.
The company provides chipmakers with software and services to mass produce patterns on silicon, via the method of lithography.
ASML essentially increases the value of chips, while lowering their production cost, which serves towards the growing trend for a smarter and more connected world.
Due to the company essentially offering the picks and shovels for the rapidly growing semiconductor industry, the industry’s growth has considerably stretched its revenues and margins, transforming ASML into a cash-generating machine.
ASML’s shares are definitely not cheap. However, the company’s wide moat, critical role in the semiconductor industry, and attractive financials likely suggest further upside ahead. I am bullish on the stock. (See Insiders’ Hot Stocks on TipRanks)
Latest and Upcoming Results
ASML reported its Q2 results back in late July, with numbers beating analyst expectations. Revenues came in at €4 billion, 20.9% higher year-over-year, with the company having been affected by the pandemic outbreak last year.
ASML sold 69 new lithography devices, which is what semiconductor companies use in advanced semiconductor manufacturing.
In the space, no other machines can achieve what ASML’s machines do, so the company operates as a legal monopoly in that regard.
As the company continues to scale its operations, its margins have been expanding. The gross margin was 50.9% for the quarter, versus 48.2% in the comparable period last year, boosted by software upgrades as customers are attempting to raise their production capacity.
ASML’s management reassured investors that demand remains high across all market divisions, and that ASML is continuously striving to exceed output in meeting that underlying demand.
Revenues are expected to increase 35% this year, while full-year gross margins are expected to land at around 51% to 52%.
Considering that the global semiconductor shortage persists, I wouldn’t be surprised if ASML once again beat analysts’ top- and bottom-line estimates.
Valuation
ASML’a forward P/E currently stands at 37.3. On the one hand, the valuation multiple is certainly not cheap.
Still, considering the company’s unparalleled moat and ultra-low to negative rate environment in Europe (ASML is a Dutch company), it’s highly unlikely that notable valuation compression will occur.
ASML is also expected to grow EPS by double-digit rates in the medium term, which should further sustain a premium. If anything, ASML’s new €9-billion share repurchase authorization through 2023 should further confirm that management doesn’t see shares as overvalued.
Finally, while ASML’s dividend yield is tiny at the present moment, hovering below 0.4%, rapid DPS hikes are possible as profitability expands.
Wall Street’s Take
Turning to Wall Street, ASML Holding has a Strong Buy consensus rating, based on three Buys, one Hold, and zero Sells assigned in the past three months.
At $921.59, the average ASML Holding price target implies 18.4% upside potential.
Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
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