With how popular some artificial intelligence (AI) stocks have become, many investors may feel like they've missed the boat. However, one of the top ways to invest in AI just went on sale.
ASML (NASDAQ: ASML) has a technology that nobody else has, giving it a technological monopoly status. Without its machines, chip companies wouldn't be able to make the same cutting-edge chips that push the limits of computing power. As a result, ASML is one of the most critical companies in the chip value chain, thus making it a key AI player.
However, as alluded to earlier, ASML just went on sale due to a poorly received earnings report. Is this a buying opportunity? Or is there a good reason that it fell around 40% from its all-time high?
ASML's machine doesn't follow the chip cycle exactly
ASML isn't the cheapest stock on the market at $670 per share, but it's a long way off from its all-time high of nearly $1,100. With how critical of a company ASML is in the chip value chain, it may surprise investors not to see this company at its all-time high. After all, Nvidia (NASDAQ: NVDA) is selling more and more graphics processing units (GPUs) each quarter, which requires a lot of chips produced by Taiwan Semiconductor (NYSE: TSM) in a process that uses ASML machines.
However, the key thing to remember about ASML is that it isn't directly aligned with the chip business cycle. Orders for ASML's lithography machines are placed years in advance, so the capacity that is being built out now for AI chips has already hit ASML's books. Unfortunately for investors, this has caused management to reduce its expectations for 2025.
Previously, management projected between 30 billion and 40 billion euros for 2025. However, that guidance has been reduced to 30 billion to 35 billion euros -- a move that the market didn't appreciate. Following this announcement, the stock tumbled 20% in the following few trading days.
This reduction is due to China, which has become an outsized part of its business in recent years. In Q3, 47% of sales went to China, but in 2025, they project it will make up around 20% of sales -- a more historically normal level. The business reduction likely has two factors (although management didn't comment on why in its earnings release).
First, Western governments don't want China and its allies getting their hands on ASML's most cutting-edge machines, as this would allow them to produce the most technologically advanced chips available. Through various export bans imposed by the Dutch (ASML is based in the Netherlands) and the U.S., ASML is already limited in what it can sell to China, and further restrictions have recently been implemented.
Second, China is currently experiencing an economic downturn, which naturally dampens industry expansion. Both of these factors aren't doing ASML any favors, but these are fairly short-term headwinds.
Still, management is still very bullish about the future.
ASML's future looks bright
While investors didn't appreciate the decreased guidance thanks to China, long-term investors should key in on this statement from ASML:
In summary, longer-term trends are still very, very strong. Very, very positive, showing good signs of upside. But the development in the past couple of months and the customer specific circumstances that I mentioned have now led to a more gradual growth curve for our business.
Basically, ASML is still strong; it just isn't going to grow as fast as it once projected. The 30 to 35 billion euro range management gave is still pretty strong, considering where 2024 revenue is expected to come in. For 2024, management projects 28 billion euros in revenue, so the 2025 guidance range would indicate 7.1% to 25% growth. If revenue comes in at the bottom end of guidance, I wouldn't be surprised to see more investors head for the exits, but if it hits the top end of guidance, ASML could see a sharp recovery.
Right now, the stock trades for 26 times 2025 earnings.
ASML PE Ratio (Forward 1y) data by YCharts
That's not a bad price, considering that ASML is in a league of its own and has no competition.
While ASML's road may be bumpy over the next year, it still looks like smooth sailing for the long term. An investment in ASML is a bet that we'll need more chip capacity built out over the next few years. That's about as no-brainer of a prediction as we get in the investing world, and ASML will be a large benefactor of this move.
Don’t miss this second chance at a potentially lucrative opportunity
Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.
On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
- Amazon: if you invested $1,000 when we doubled down in 2010, you’d have $23,529!*
- Apple: if you invested $1,000 when we doubled down in 2008, you’d have $42,465!*
- Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $441,949!*
Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.
*Stock Advisor returns as of November 11, 2024
Keithen Drury has positions in ASML and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends ASML, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
