ASML (ASML) dipped after the release of fiscal Q3 2024 quarterly financial results on October 15, erasing most of its gains for the year. I believe a bleak near-term outlook and a miss on system bookings led to an overreaction. ASML makes photolithography systems used by foundries like Taiwan Semiconductor Manufacturing Company (TSMC) to manufacture semiconductors for chip designers like Nvidia (NVDA). These semiconductors are used in several compute-intensive applications, including AI and high-performance computing.
I remain bullish on ASML stock, having expressed my opinion earlier in August, because of its unrivaled status in a highly technical market and several multi-year growth prospects tied to major structural changes. But before we discuss the moat and the growth prospects, let’s review what led to the overreaction.
What Led to The Sell-Off
I believe the recent dip in ASML stock has created an attractive entry point for new and existing investors. Shares sank because the company missed expectations for system bookings. ASML reported that its net system bookings during Q3 2024 amounted to 2.6 billion euros ($2.8 billion), more than 50% lower than what analysts polled by Bloomberg expected, which stood at 5.39 billion euros. The company’s management attributed the lower-than-expected bookings to a slow recovery in its end markets outside of AI and cautious customers.
Moreover, the sell-off was also influenced by cuts to the Fiscal 2025 guidance. Management now expects fiscal 2025 sales to range between 30 billion euros and 35 billion euros, down from the prior range of 30 billion euros and 40 billion euros. ASML also cut its gross margin guidance for Fiscal 2025 to range between 51% and 53%, down from 54% and 56%. These cuts were triggered by falling sales in China and a delay from customers’ side in the shipments of its EUV systems.
Following recent events, ASML expects to deliver less than 50 Low NA EUV tools in 2025, and management has indicated that some of these orders might be pushed into 2026, but that has not been confirmed yet. As ASML’s traditional end markets recover and its AI application space expands, this wide-moat business can do well in the long run. Now, let’s talk about ASML’s near-monopoly position in a market with high barriers to entry.
ASML Is Unrivaled in a High Barrier Market
ASML’s near-monopoly position in EUV lithography systems is central to my bullish case for the stock. EUV lithography systems print complex chip designs onto semiconductor materials like silicon wafers. Here’s a scenario that will help you understand the importance of ASML: Nvidia does the design work for chips and outsources manufacturing to TSMC, which then buys ASML’s machines to manufacture Nvidia’s chips. Without ASML, we would not have Nvidia chips or any complex chips.
According to estimates by Khaveen Investments, ASML has an 83% market share in Extreme ultraviolet (EUV) lithography systems. This has allowed the Dutch company to enjoy pricing power. Over the trailing twelve-month period, ASML’s operating margins stand at 30.72%, and its gross margins are 51.15%. The demand for Nvidia chips is “insane,” with ASML in a prime position to capitalize on this. EUV lithography is a highly technical market with a high barrier to entry, and ASML is the unrivaled kingpin.
ASML Has Many Multi-Year Growth Opportunities
I’m bullish on ASML’s multi-year growth opportunities from new AI use cases. I’ve discussed in prior analyses that there’s a lot more to AI than large language models, and ASML will help support all those emerging use cases. For instance, I discussed previously how Nvidia is now facilitating autonomous driving, robotics, and AI-enabled drug discovery. Guess who will benefit from a surge in demand for powerful chips to support these new use cases? ASML.
During recent calls, ASML’s management has highlighted that it sees an expanding application space for ASML’s nodes. While ASML’s other end markets on the logic and memory side, i.e., PCs and smartphones, are still recovering, its AI-related business is strong. ASML is also making progress on its EUV technology. The company said its new Low NA NXE:3800E systems offer 37% more throughput over the NXE:3600D, and it’s seeing more customers opt for the newer model.
Moreover, its high NA systems are promising, and the company is on track to ship a third one to a major customer. I am keeping things simple because I firmly believe in understanding a company in the simplest way possible before investing in it. I see ASML as a near-monopoly business in an industry with high barriers to entry. It’s a key enabler of many global structural changes yet to materialize. It’s constantly innovating and is seeing favorable demand for its products that are tied to AI.
Analysts’ Take on ASML Stock
On the Street, ASML stock sports a consensus Strong Buy rating based on 4 unanimous Buy recommendations. The average price target of $917.67 represents an upside of 28.51% from current levels.
The Takeaway
ASML is a key player in the AI investment theme, and it is well-positioned to benefit from the strong demand for next-generation AI chips, which will facilitate many new use cases beyond LLMs. While 2024 and 2025 look bleak, the future looks promising. After all, the company is the primary supplier of EUV lithography machines, and due to its dominant market position, it is one of the best-unrivaled stocks for the next decade.
Therefore, the recent sell-off in ASML stock is nothing of concern for long-term investors. Instead, I believe, the overreaction has created a buying opportunity. Consequently, I am still bullish on ASML shares.
