ASML stock (NASDAQ:ASML) hit a new all-time high today. The stock’s ongoing rally highlights reinforced investor confidence despite what initially looked like a slow Q1. While the company’s revenues declined in its most recent report, this result reflects the cyclical nature that tends to impact the semiconductor industry from time to time rather than a signal of a deeper, systemic issue. In fact, sales are projected to surge massively in FY2025, indicating that the stock may not be as pricey as it appears. Thus, I am bullish on ASML stock.
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Unpacking ASML’s Declining Revenues
ASML’s Q1-2024 sales decline might seem concerning, particularly given the company’s high-flying status and the significant expectations already factored into its stock price in today’s booming tech sector. Still, its results essentially highlighted the semiconductor industry’s inherent cyclicality. Companies in the space are well-known for their periods of rapid expansion followed by phases of contraction. This cyclical nature can temporarily affect AMSL’s sales, which monopolizes highly critical lithography equipment required for semiconductor manufacturing.
Indeed, in Q1, net System sales fell from €5.68 billion in Q4 2023 to €3.97 billion. This reduction points to a cautious approach among semiconductor manufacturers, who now appear eager to strengthen their cash positions. The decline in net bookings, which dropped from €9.19 billion to €3.61 billion, further underscores the hesitation in committing to new equipment investments.
These steep declines may appear alarming, but it’s important to again emphasize that they illustrate the industry’s typical cyclical adjustments as customers respond to demand and economic uncertainties. This is a common phenomenon. For instance, ASML posted revenue declines in Q1 of 2019 and Q1 of 2022 for similar reasons. Nevertheless, these declines did not hinder its overall substantial growth, with net sales increasing from €11.82 billion in 2019 to €27.56 billion last year.
Another metric that reflected the industry’s state in Q1 is ASML’s free cash flow, which came in at a negative €669.2 million for the period. This can be attributed to softer down payments from ASML’s customers and higher inventory levels compared to the previous quarter as semiconductor manufacturers attempt to return to profitability and effectively manage their balance sheets.
Once again, however, you can see that negative free cash flow was also the case in the first quarters of 2019, 2020, 2021, and 2022 despite the company eventually posting robust and growing free cash flow for each full-year period.
Full-Year Outlook Remains Robust, Massive Sales Surge in FY2025
Management’s outlook for FY2024 remains robust despite the seemingly sluggish Q1 for the reasons just discussed. They view this year as a pivotal period for building momentum, anticipating that revenue will hold steady compared to 2023 as they focus on setting the stage for an explosive sales surge in FY2025.
The expectation is for a stronger second half of the year, driven by positive industry trends, including improved utilization of their tools by both Memory and Logic customers. Additionally, management is optimistic about the effective navigation of inventory challenges, particularly in bringing downstream inventory levels to more normalized conditions.
Wall Street’s estimates reflect this outlook. Net sales for the year are anticipated to be €27.67 billion, virtually flat compared to FY2023, while earnings per share (EPS) is expected to land at €19.02, down about 4.5% versus last year. Nevertheless, both figures are expected to skyrocket in FY2025. Consensus estimates for the year see net sales of €36.36 billion, up 31.4% year-over-year, and EPS of €29.70, up by an even more significant 56.2%.
The Valuation Isn’t Crazy Despite the Prolonged Rally
ASML’s prolonged rally might lead some investors to question whether the stock’s current valuation is too high, especially if Q1 results are viewed without proper context. Anyhow, this concern seems unfounded. While FY2024 is expected to be a challenging year due to the current industry conditions, the anticipated explosive growth in FY2025 as these dynamics shift suggests that ASML’s valuation is quite reasonable.
At 33.5x Wall Street’s FY2025 projected EPS, I believe ASML’s stock is fairly valued, given its strong moat and the potential for a multi-year bull market driven by advancements in AI.
Is ASML Stock a Buy, According to Analysts?
Despite ASML’s extended rally, Wall Street’s view on the stock remains modestly bullish. ASML maintains a Strong Buy consensus rating based on six unanimous Buys assigned in the past three months. At $1,102.25, the average ASML stock forecast suggests 3.7% 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 34.02% per rating and a 100% success rate. Click on the image below to learn more.
The Takeaway
ASML’s latest results, evidenced by falling revenues, mirror the cyclicality inherent in the semiconductor industry. Despite short-term challenges, the company’s forward-looking outlook remains vigorous, with significant growth anticipated in FY2025. This suggests that ASML’s current valuation, despite an already prolonged rally to new highs, aligns more or less reasonably with its long-term growth potential. In light of this, I continue to be bullish on ASML stock.