ASML Holding (ASML), the world leader in semiconductor manufacturing machines, has an equity valuation that looks sustainable despite a high P/E ratio, in my opinion. Considering that management is expecting approximately 45% revenue growth in 2025, ASML stock is likely to be a prosperous near-term investment. Longer term, ASML also has an unchallenged moat in facilitating the production of the most advanced semiconductors on the planet. Therefore, I am bullish on ASML right now.
2025 Expansion Following a 2024 Contraction
ASML viewed 2024 as a transition year, and it focused on investments in capacity expansion and technological advancements to prepare for a demand increase in 2025. Management has ramped up the output capacity of its extreme ultraviolet (EUV) systems. This investment is critical in order to meet the current demand for advanced semiconductors driven by AI.
ASML Holding has reported a -1.5% contraction in its trailing twelve-month revenues. However, for Fiscal 2025, management forecasts year-over-year revenue growth of approximately 45%. This forms the basis of my near-term bullish outlook on ASML stock. The expected growth will be driven by well-established partnerships with leading semiconductor producers. This shall position ASML in a terrific spot to capitalize on the rising demand for manufacturing equipment driven by the growing need for semiconductors.
The Valuation Is Reasonable Despite the Risks
I rate ASML a Buy for its valuation at the moment. The stock’s forward P/E GAAP ratio is 5% lower than its five-year average. With a five-year average revenue growth of 23%, the much sharper ramp expected in 2025 anchors this investment opportunity.
However, ASML stock’s valuation is richer than that of Taiwan Semi (TSM), the world’s largest semiconductor foundry, which has a forward P/E GAAP ratio of 26.7x. The sector median valuation is 29x. With ASML’s P/E standing above 38x, there is possible downside risk here if management encounters significant operational challenges.
Nonetheless, based on my analysis, ASML’s valuation multiples are likely to expand in 2025 due to expected high revenue growth and improved investor sentiment. However, into 2026 and beyond, I believe there could be some downside volatility as the growth rate stabilizes.
ASML Long-Term Growth Catalysts are Strong
Another core reason why I am bullish on ASML is market growth beyond just AI. That includes 5G, edge computing, and industry digitalization. Since ASML is the sole provider of the EUV technologies that are crucial for the manufacturing of advanced semiconductor nodes, the company has a robust market lead and long-term moat.
Furthermore, this is a company with expanding margins, including an exceptionally high net margin of 26.5% which is rare for the semiconductor industry. High margins support the company’s free cash flow. While cash flow has recently been lower than usual due to a spike in capital expenditures, FCF should improve in the near term. In turn, this will allow management to continue to invest in expanding the company’s capabilities.
ASML has already invested more than €6 billion over 17 years to develop its EUV technology. As a result, the company has an extensive market lead both in terms of time to market and required capital. Competitors could have an uphill battle trying to challenge ASML. The company currently has no direct competitors in EUV systems, as existing peers are focused on older technologies like deep ultraviolet (DUV).
Geopolitical Risks Are the Greatest Threat
One consideration that could weaken my bullish outlook on the company is geopolitics. ASML has encountered challenges from U.S.-imposed export restrictions limiting its sales to China – a problem that may intensify. Geopolitical tensions, especially involving China and Taiwan, amount to a wildcard here. Any worsening of the situation could significantly impact ASML’s largest customer, TSMC, which is based in Taiwan.
In my opinion, heavy downside volatility is unlikely, as an invasion of Taiwan by Chinese forces would arguably be counterproductive even for China. However, I do expect certain trade tensions to intensify at times in the near future, potentially causing downward revisions in analyst growth estimates.
Wall Street’s View of ASML?
Wall Street currently has a very optimistic view of ASML overall. The four analysts covering the stock all have Buy ratings, culminating in an average ASML price target of $1,212.33. This consensus price target reflects potential upside of nearly 50%.
Conclusion: ASML Is an Exceptional Near-Term Investment
Based on its current valuation and near-term prospects, I rate ASML stock a Strong Buy. I typically focus on companies with excellent long-term prospects, and ASML’s strong competitive moat qualifies for that status. However, even in the near term, I believe the stock offers a high upside potential, driven by projected 40%+ revenue growth over the next 12 months.
