ASML's Stock Drop: A Potential Opportunity for Investors

ASML Stock Dropped After Announcing Earnings. Here's Why That's a Good Thing.

ASML (ASML -0.22%) dealt with a slew of bad news when it announced its financial results for the second quarter of 2024. The maker of semiconductor manufacturing equipment faces declining revenue even as customers demand more of the world's advanced chips. That's because restrictions on equipment sales to China reduce its revenue potential. Additionally, rhetoric from presidential candidate Donald Trump suggesting Taiwan may have to pay the U.S. for its defense stoked concerns about the chip manufacturing supply chain. Admittedly, one can miss the forest for the trees when it comes to ASML. The company's inability to sell its most advanced equipment to China has hurt the semiconductor stock. Also, since Taiwan accounts for approximately two-thirds of the world's production, any regional turmoil bodes poorly for the company, at least on the surface. Nonetheless, this may be good news for investors who seek a buying opportunity in ASML. For all of the concerns related to China and the surrounding region, the massive demand for artificial intelligence (AI) chips plays into ASML's hands. Due to ASML's technical lead in extreme ultraviolet (EUV) lithography, producing the world's most advanced chips requires ASML's equipment. Moreover, the aforementioned industry concentration in Taiwan has stoked the fears of governments across the developed world. Consequently, they have begun to subsidize the construction of fabs in the U.S. and Europe to protect the supply chain from potential turmoil in East Asia. Despite heavy investments in East Asia, Taiwan Semiconductor Manufacturing and Samsung are not immune to these fears and are building fabs in the U.S. and receiving subsidies from the U.S. CHIPS Act. Another company receiving subsidies is Intel. Intel benefits in one sense since most of its production capacity is outside East Asia. Additionally, in a bid to reclaim the technical lead, it has become a major buyer of ASML's High-NA EUV machines, which is its most technically advanced product. Such trends will likely draw business to ASML for the next few years. Additionally, analysts had already predicted that 2024 would be a slower-growth year for ASML, which could make the buying opportunity more lucrative. ASML's financials Still, in 2024, lower client spending prompted ASML to forecast a "pause" in demand, and that seems to have turned into a pullback. In the first six months of 2024, ASML reported revenue of just under 12 billion euros ($13 billion), a 15% decrease from year-ago levels. That caused profits to fall 28% from a year earlier to 2.8 billion euros ($3.1 billion). For Q3, ASML expects to bring in between 6.7 billion euros ($7.3 billion) and 7.3 billion euros ($8 billion) in revenue. This will amount to only modest growth as the company reported revenue of 6.7 billion euros in the third quarter of 2023. Despite the sluggish financial performance, the stock remains in an uptrend. Even with the recent pullback, ASML rose by around 20% over the last year. Yet, the stock remains relatively expensive, with its P/E ratio of 49 above the five-year average of 43. Admittedly, the earnings multiple rarely falls below 30, but history indicates the valuation could become cheaper. Still, the multiple will probably fall once the so-called pause ends. Hence, investors can feel comfortable adding shares amid the recent pullback. Consider ASML Despite current challenges, ASML stock should benefit investors in the longer-term. Since it makes the machines that build the world's most advanced chips, it is an irreplaceable part of the supply chain for the world's most advanced semiconductors. With the lower share prices caused by its current difficulties, investors can buy ASML at a significant discount. Indeed, turmoil related to East Asia and temporarily slower business may weigh on the stock for now. However, the need for AI chips and the desire to move manufacturing away from East Asia are tailwinds that should bolster ASML and its shareholders for years to come.

ASML Stock: Bear vs. Bull | The Motley Fool

First, it followed up its second-quarter earnings beat with soft guidance for the third quarter. Second, several reports indicated the Biden administration would further tighten its restrictions on semiconductor equipment sales to China. Lastly, former President Donald Trump commented that Taiwan -- the world's largest producer of chips and ASML's biggest single market -- should pay the U.S. for military protection against China. These developments sent shockwaves through the semiconductor sector and sank ASML, the world's leading producer of lithography systems. Let's review the bear and bull cases to see if that pullback represents a buying opportunity. ASML's lithography systems are used to optically etch circuit patterns onto silicon wafers. It's the largest producer of deep ultraviolet (DUV) systems, which are used to produce older and larger chips, and the only producer of extreme ultraviolet (EUV) systems, which are required to manufacture the smallest and densest chips. All of the world's top foundries -- including Taiwan Semiconductor Manufacturing, Samsung, and Intel -- use ASML's EUV systems to produce their most advanced chips. ASML's monopolization of that crucial technology gives it plenty of pricing power and makes it a linchpin of the global semiconductor market. However, that dominance also makes it a top target for government regulators in the escalating chip war between the U.S. and China. The Dutch government already barred ASML from shipping its EUV systems to China in 2019, and it expanded that ban to include its newer DUV systems in 2023. If the U.S. pressures the Dutch government to pass even harsher export curbs, ASML could be banned from shipping any of its systems to China, which still accounted for 26% of its revenue in 2023. Taiwan, which accounted for 29% of its sales, is also heavily exposed to the escalating tensions between the U.S. and China. ASML's growth is cyclical, but it's grown at an impressive clip over the past five years as its gross margin consistently improved. Most of its recent growth has been driven by the expansion of the artificial intelligence (AI) market and the "process race" between the world's top foundries to manufacture the smallest and most advanced chips. Data source: ASML. EPS = earnings per share. The bears will note that ASML expects to generate flat revenue growth this year as it deals with the export curbs in China, laps the AI market's initial growth spurt, and gradually transitions from its EUV systems to its newer high-NA EUV systems. Analysts expect ASML's revenue to stay roughly flat this year as its EPS dips 6%. The bears will claim those are dismal growth rates for a stock that trades at 44 times forward earnings. They'll also warn you that tighter export curbs against China could make it challenging for ASML to even match those conservative estimates. In a worst-case scenario, a military conflict between China and Taiwan would instantly wipe out more than half of ASML's revenue. But if that black swan event happens, the entire stock market -- not just ASML or TSMC -- would likely crash. The bulls believe ASML's growth will accelerate in 2025 and beyond as it ramps up its shipments of EUV systems for producing even smaller and denser chips. The stabilization of the PC and smartphone markets should complement that growth. ASML expects those tailwinds to pick up in the second half of 2024, while analysts expect its revenue and EPS to grow 32% and 62%, respectively, in 2025. Based on those expectations, ASML's stock trades at just 27 times next year's earnings. The bears make some good points about ASML's challenges, but I'm still bullish on this stock for three reasons: It has monopolized an indispensable chipmaking technology, it's tightening its grip on the world's leading foundries with its high-NA EUV systems, and it's a balanced way to profit from the secular growth of the semiconductor market without putting all of your eggs in a single chipmaker's basket. ASML stock might remain under pressure as investors focus on its lackluster near-term growth and regulatory headwinds, but I believe it can overcome those challenges and set new highs in just a few years.