ASML Stock (NASDAQ:ASML): Mega Rally Unlikely to Die Anytime Soon

ASML stock (NASDAQ:ASML) has registered a mega rally over the past year, which I don’t see dying out anytime soon. Positioned as a leader in photolithography systems, the Netherlands-based giant stands at the forefront of several trends driving growing demand for semiconductors. Its agnostic position within the field ensures continued success as the industry evolves, irrespective of which semiconductor company ends up on top. Accordingly, I am bullish on the stock despite its premium valuation.

ASML stock has gained 51% in the past year.

Picking Chip Stocks Is Hard, But ASML Offers The Solution

Picking semiconductor stocks is difficult for numerous reasons, including the industry’s wild cyclicality, complicated supply chains, rapid technological advancements, and geopolitical factors (such as the ones that Taiwan Semiconductor Manufacturing (NYSE:TSM) is going through). Take Nvidia (NASDAQ:NVDA), for example. Virtually no investor was expecting the unbelievable surge in the company’s revenues and profits last year until it actually materialized.

This is why investing in ASML presents a compelling case for many investors over trying to pick individual semiconductor stocks. It’s essentially due to its agnostic nature within the industry. ASML doesn’t produce semiconductors itself; rather, it specializes in supplying the photolithography equipment necessary for the production of advanced semiconductor chips to the manufacturers themselves. Its clients include TSMC, Intel Corp. (NYSE:INTC), and Samsung Electronics Co. (OTC:SSNLF), among other industry majors.

Importantly, I have to highlight that the company stands unrivaled in its field. The complex technology and expertise that ASML has developed over decades mean that no competitor has managed to come close. The company literally operates a natural monopoly.

This is where I base my main argument. Being positioned agnostically within the semiconductor value chain and shielded from competition, ASML appears poised to thrive regardless of which semiconductor company leads the way at any given moment.

Therefore, by choosing to invest in ASML, one stands to benefit from the megatrends currently propelling the semiconductor industry, such as AI and self-driving cars, without trying to find the “next winner.”

Can ASML Sustain Its Growth Momentum?

ASML’s track record in recent years demonstrates that the company has developed significant growth momentum. From FY 2021 to FY 2023, the company achieved an impressive compound annual growth rate of 25.4% in revenues. Now, the following question emerges: can ASML maintain such an extraordinary momentum?

The answer appears to be yes, albeit with the caveat that FY 2024 is expected to be a year of consolidation before notable growth resurfaces in FY 2025. Following the company’s significant revenue growth of 30% last year, management expects that ASML’s non-EUV business will be down in 2024, mainly due to lower immersion system sales. Further, they also expect the Installed Base business to see relatively flat sales compared to the previous year.

Based on this outlook and management’s Q1 guidance, which projects revenues between €5.0 billion and €5.5 billion, Wall Street expects its revenues to land close to $30.18 billion this year, relatively flat (up 0.6%) year-over-year. However, revenue growth is expected to rebound to 27% in FY 2025.

This is because management expects the industry to be in the middle of a cyclical upturn in 2025. In fact, the company expects to prepare for the numerous new fabs being built globally. Given that these fabs are expected to employ ASML’s tools, management feels confident about the chances of such an uptick.

In the meantime, note that ASML ended last year with an order backlog of €39 billion, or roughly $42 billion, which provides significant cash flow visibility.

ASML’s Valuation Isn’t That Crazy

As I mentioned earlier in the article, I don’t see ASML’s rally dying out anytime soon. Besides its one-of-a-kind position in the space, which is likely to keep investors hungry for more shares, the stock’s valuation isn’t that crazy. While Wall Street expects EPS to fall by 4.4% this year to $20.69, the anticipated revenue rebound in FY 2025 is expected to boost EPS by about 51% to $31.11 in the year to follow.

This implies that ASML is currently trading at about 32x its expected earnings two years out, which I don’t think overvalues the stock. Considering that ASML is literally one of the most important companies in the world, with an irreplaceable product line in a flourishing industry, the modest premium seems very well justified.

Is ASML Stock a Buy, According to Analysts?

Checking Wall Street’s view on the stock, ASML has a Strong Buy consensus rating based on six unanimous Buys assigned in the past three months. At $1073.40, the average ASML stock price target suggests 10.1% upside potential over the next 12 months.

If you’re wondering which analyst you should follow if you want to buy and sell ASML stock, the most accurate analyst covering the stock (on a one-year timeframe) is Sandeep Deshpande of JPMorgan (NYSE:JPM), with an average return of 29.18% per rating and a 100% success rate. Click on the image below to learn more.

The Takeaway

To sum up, I believe that ASML’s distinctive position in the industry, coupled with its consistent growth momentum, is likely to sustain the bullish sentiment currently fueling the stock. The company’s agnostic nature shields it from the uncertainties associated with picking individual semiconductor stocks, while its unrivaled technology ensures its continued dominance in the market.

Therefore, despite expectations of a consolidation year in 2024, expectations of a cyclical upturn in 2025 bode well for its future growth. In the meantime, although the stock has already registered a tremendous rally, the valuation seems reasonable. This factor should also contribute to strong investor interest in the stock, moving forward.

Disclosure