ASML Holding (NASDAQ:ASML) is a Dutch business that designs, manufactures and sells advanced semiconductor manufacturing equipment. As a key player in the semiconductor industry, ASML could be in a strong position to benefit from the ongoing proliferation of AI and other technology trends that increase demand for advanced chips. Is ASML a buy now, and how much room could the stock have left to run in today’s highly valued market?
ASML’s Unique Market Position
One of the defining features of ASML is its incredibly strong moat formed by a completely unique position within the semiconductor ecosystem. ASML has a near-complete monopoly on the ultraviolet lithography machines used to etch silicon wafers when creating the most advanced semiconductors. As a result, ASML can be seen as a foundational pick-and-shovel play on AI and other emerging technologies that require increasingly advanced chips.
ASML’s largest customers include TSMC, Samsung and Intel. Through these businesses, especially TSMC, ASML’s equipment plays a vital role in production for some of the biggest names in the chip industry. Specifically, ASML’s lithography machines are used to create chips for the likes of NVIDIA and AMD.
By playing such a foundational role in the semiconductor industry, ASML could be uniquely positioned to take advantage of multiple secular growth trends. The first and most obvious of these is the growth of AI chip demand. The AI chip market could be worth $300 billion or more by 2030, reflecting strong growth over the next half-decade.
Perhaps even more important for ASML is the ongoing expansion of manufacturing facilities to support this rising demand. TSMC, for instance, is expected to invest $165 billion in US manufacturing and is already pushing to speed up its American production. As large customers expand their production capabilities, it’s likely that ASML will see strong equipment sales to outfit new facilities.
ASML also isn’t standing still when it comes to innovation. The business is working to roll out a new machine it calls High NA, its latest lithography machine that promises improvements in both speed and efficiency. By staying at the cutting edge of semiconductor equipment, ASML makes it less and less likely that a competitor will be able to effectively emerge and catch up to it quickly enough to seize any meaningful market share.
ASML’s Value Proposition: A High Price for a Quality Business
At 35.5 times earnings, 10.4 times sales and 36.3 times cash flow, there’s little disputing that the market has assigned a premium valuation to ASML. Even most analyst price forecasts don’t project much immediate upside for ASML stock, as the consensus price target of $866.96 is below the current price of $927.80. It’s worth noting, however, that the range of analyst price forecasts is quite broad and runs from a low of $607.04 to a high of $1,083.90.
The stock’s premium price, however, may be slightly more palatable when ASML’s profitability is taken into account. Over the last 12 months, for instance, ASML has delivered a net margin of 29.3 percent alongside an ROE of 55.3 percent and an ROIC of 44.0 percent. Impressively, this has been accomplished without outsized use of debt. ASML’s long-term debt currently stands at $4.3 billion, a relatively low level for a business with a market cap of over $370 billion and well below the $8.5 billion it holds in its cash reserves.
ASML’s Potential for a Cyclical Downturn
Despite strong profitability and an extremely strong economic moat, it’s important to acknowledge that ASML, like the chip industry at large, is somewhat cyclical and could be headed into a period of more muted performance. Any potential downturn in the market could also be made worse by threatened tariffs on semiconductors imported into the United States. Recently, the Trump administration floated the idea of imposing a tariff of up to 100 percent on semiconductors brought into the US unless the manufacturers of those semiconductors had already committed to investing in US production.
It’s worth remembering, though, that even with some performance metrics beginning to soften, ASML is still delivering attractive results. In Q2, for instance, ASML reported €7.7 billion in overall revenue, essentially flat from the quarter before. Net bookings, however, rose impressively from €3.9 billion in Q1 to €5.5 billion in Q2. For Q3, management expects revenue in the range of €7.4 billion to €7.9 billion.
ASML has also made significant progress toward its goal of expanding its net margins. As of Q2, gross margin came in at 53.7 percent. Even with some possible softness in the market going forward, therefore, ASML still seems to be in a very good position from which to deliver value to its shareholders and drive additional growth.
Is ASML Stock a Buy?
Even with some possible near-term headwinds, ASML looks like it could be a strong business to own over the next several years as the market for AI and other advanced technologies puts ever more demand on chip manufacturers. ASML’s position in a market that is expected to see ongoing growth over the next several years could make it worth owning, even if the immediate picture may not result in massive gains.
It’s also worth noting that ASML pays a modest dividend that could expand steadily in the years to come. At the moment, the yield of ASML shares is just 0.8 percent. With the growth trends that are likely to act on ASML’s earnings and cash flows going forward, though, it’s quite possible that the stock could deliver a respectable level of dividend growth.
A final argument in ASML’s favor is the fact that it has already built up a customer base that includes most of the world’s large semiconductor manufacturers. These businesses, which themselves are expected to grow at steady rates through the coming several years, are largely dependent on ASML for key equipment. Because it primarily does business with other industry giants, ASML has a highly stable revenue base that, while certainly cyclical, is unlikely to be at any significant long-term risk.
Between strong current performance, a wide moat and what appears to be a good growth runway ahead of it, ASML may be a case in which it’s reasonable to pay a high price for a particularly high-quality business. Though it may not produce the kind of extremely rapid returns investors have become accustomed to from AI-exposed stocks in recent years, ASML appears to have many of the characteristics of an attractive long-term compounder.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.