When some investors think of essential semiconductor companies, they often look to Taiwan Semiconductor (TSMC) since it is the fab making chips for Apple, Nvidia, and others.
However, TSMC itself depends on an equipment maker for its manufacturing, and that equipment maker is ASML (ASML 0.82%). ASML is the only maker of extreme ultraviolet lithography (EUV) machines, the technology required to make the most advanced semiconductors. Additionally, thanks to rising demand and geopolitical concerns, the semiconductor stock is on a predictable growth trajectory that can significantly benefit its investors.
The ASML edge
ASML calls itself “the most important tech company you’ve never heard of.” Indeed, it has no direct contact with the consumer market, and its customer base is only a relatively small number of fabs that manufacture semiconductors.
It also makes deep ultraviolet lithography (DUV) machines, and in that market, it competes with Lam Research, Applied Materials, and others. Nonetheless, only ASML has mastered the EUV technology. Thus, TSMC, Samsung, and Intel need the Netherlands-based tech giant to maintain a competitive edge.
The market will probably need more of these machines. The advent of technologies like AI will probably take chip demand exponentially higher. Fortune Business Insights predicts the industry will grow at a 12% compound annual growth rate through 2029. That will make it a $1.4 trillion industry by that year, well above its $573 billion size in 2022.
To this end, ASML plans to triple its capacity growth for EUV machines by 2026. It also revealed its intention to increase DUV capacity by 2.5 times and introduce the more advanced high-NA EUV machines by 2027 or 2028.
Moreover, Taiwanese companies control around two-thirds of the world’s third-party chip manufacturing, and Taiwan’s tenuous relationship with China, its much larger neighbor, is a cause for concern.
Consequently, both companies and governments want to reduce their dependence on Taiwan. To that end, they are working to build fabs in the U.S. and Europe, which means they will need more ASML equipment.
The company’s financials
Some of that increased interest has already materialized. In the first half of 2023, net sales were nearly 14 billion euros ($15 billion), a 52% increase from the first two quarters of 2022. And since operating expenses grew at a slower rate, ASML reported a net income of 3.9 billion euros ($4.2 billion) in the same period, an 85% increase from year-ago levels.
Additionally, the company forecasts between 6.5 billion euros and 7 billion euros in Q3 net sales. If that holds, it would mean a 16% net-sales increase at the midpoint, pointing to some slowing sequentially.
That lower growth rate may be one reason ASML stock has not performed as well as many tech peers, rising only about 13% since the beginning of the year.
Still, this slow growth may have made ASML more of a buy. After trading above 45 times earnings for much of the bull market, the price-to-earnings (P/E) ratio has fallen back to 30. That valuation is arguably inexpensive considering its revenue-growth rate, and a likely recovery in the rate of increase could make its lower P/E ratio attractive to new investors.
Consider ASML
Chip demand is only increasing, and ASML’s dominance in the production of EUV machines will likely bolster the stock long term. The advent of AI and other technologies will probably increase the demand for its machines, as will a move to produce a lower percentage of the world’s chips in Taiwan.
Moreover, even amid a slowdown, net sales continue to grow rapidly, boosting company profits. Such growth should keep ASML a safe and profitable investment for years to come.
Will Healy has positions in Intel. The Motley Fool has positions in and recommends ASML, Apple, Applied Materials, Lam Research, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: long January 2023 $57.50 calls on Intel and long January 2025 $45 calls on Intel. The Motley Fool has a disclosure policy.
