ASML Holding Stock: Valuation Looks Attractive Now

I am neutral on ASML Holding (ASML) as its significantly undervalued stock price based on historical valuation multiples and analyst consensus price targets are offset by the numerous headwinds and challenges that the business is trying to overcome at the moment.

ASML is a Netherlands-based leading semiconductor company. It specializes in photolithography systems, making it a key player in the rapidly advancing technological capabilities of semiconductor chips. As a result, ASML’s client list includes every single major semiconductor manufacturer.

In this article, I will lay out three reasons why I am bullish on ASML stock at current prices.

Weak Q1 Results

ASML recently reported impressive Q1 results, which showed revenue coming in at the high end of the company’s guidance at €3.5 billion. Q1 net bookings were also impressive at €7 billion, including €2.5 billion in EUV systems.

The company also continued to advance its technological competitive advantage during the quarter as it launched its first eScan460 system. This is a next-generation single beam inspection system that has higher resolution and 50% faster throughput than the previous system.

Last but not least, ASML announced that it expects to repurchase up to €9 billion worth of the company’s stock by the end of 2023. ASML made substantial progress on this plan in Q1 by buying back €2.1 billion worth of shares. The company has also been growing its dividend at a rapid pace as it doubled the dividend in 2021 and will likely continue growing it rapidly in the years to come.

Strong Competitive Positioning

ASML’s competitive positioning is hard to beat in its sector as its entrenched relationships with the top semiconductor manufacturers and substantial technical prowess give it strong profitability.

On top of that, it enjoys enormous economies of scale, which enable it to invest aggressively in research and development to further enhance its technical prowess without hurting profit margins too much. Its scale also enables it to hire the best and brightest in the industry to give it an additional edge over competitors.

Attractive Stock Price

In addition to its very robust fundamentals and formidable competitive advantages, ASML’s stock price looks quite attractive after its recent sell-off. For example, its forward price-to-earnings ratio is currently 25.6x, which stands at a clear discount to the company’s five-year average forward price-to-earnings ratio of 32.3 times.

Furthermore, its forward enterprise-value-to-EBITDA ratio is just 20.1 times compared to its five-year average of 25 times.

Wall Street’s Take

Wall Street analysts appear to be somewhat bullish on the stock. According to Wall Street analysts, ASML earns a Moderate Buy consensus rating based on three Buys, one Hold, and one Sell rating assigned in the past three months. Additionally, the average ASML price target of $686.67 puts the upside potential at 28.7%.

On top of that, earnings per share are expected to continue growing at an impressive clip for the foreseeable future, with a 17% CAGR forecast through 2026. The company’s free cash flow is expected to grow at a 21.6% CAGR over that time span, while EBITDA is expected to increase by 13.3%.

The dividend per share will also likely continue to grow, albeit at a slower pace, with a 5.2% CAGR expected. This is reasonable given that management is prioritizing buybacks over dividends and wants to retain a lot of cash flow to continue strengthening its technological leadership in the sector.

Summary and Conclusions

ASML stock is backed by very strong growth momentum and robust profitability. On top of that, it has a clear edge in technological prowess and in research and development capabilities.

With its enormous economies of scale over competitors, ASML should be able to continue to sustain, if not expand, its technological edge and overall sector leadership for years to come while simultaneously growing its dividend at a solid clip and buying back shares aggressively.

Meanwhile, the stock price looks quite attractive relative to historical valuation multiples, and Wall Street analysts are generally bullish on it as well. In fact, the consensus price target implies substantial upside potential over the next year.

Another factor to consider is that the global economy is experiencing technological advancements at an exponential pace. With the massive focus on artificial intelligence and data analytics in today’s commercial and government sectors, as well as the growing military competition between great powers like China and the United States, key technology players in the semiconductor industry are poised to reap rich rewards.

While no investment is risk-free, and the current challenges plaguing the global supply chain and the chance of plunging into a global recession could certainly hurt ASML’s performance, the margin of safety looks wide enough, and the business fundamentals and competitive advantages look compelling enough here that investors might want to consider adding shares.

Discover new investment ideas with data you can trust.