Investors in Europe’s most valuable tech firm face near-term turbulence as ASML Holding NV contends with the impact of a semiconductor industry slowdown — but analysts say patience is expected to pay off in the long run.
(Bloomberg) — Investors in Europe’s most valuable tech firm face near-term turbulence as ASML Holding NV contends with the impact of a semiconductor industry slowdown — but analysts say patience is expected to pay off in the long run.
The world’s only maker of machines needed to produce the most advanced chips crucial to everything from cars and smartphones to computers and airplanes, is seeing demand for its products outstrip its capacity to supply them.
Given its dominant market position, investors should view recent share price declines as an entry point, Jefferies analyst Janardan Menon said in an interview. “There is no competition for it at all,” he said of the firm. Menon sees the sector soon entering an upcycle, which will peak sometime in 2025 and fuel margin expansion for ASML in the next 12 to 18 months. “We see no reason why the stock should not end up being a very strong performer.”
Priced at about 29 times forward earnings, ASML appears more expensive than US peers such as Applied Materials Inc. and KLA Corp. That valuation gap is “justified” considering its dominant footing in advanced chipmaking machines, according to Menon, whose target price of €950 ($1,057) on the stock is the highest among analysts tracked by Bloomberg and implies a rally of over 50% from its current price.
Still, stock investors will have to stomach volatility along the way, with the global chip industry currently grappling with the impact of inflation and recession fears that last year triggered a rapid pullback on consumer and business spending, hurting sales of electronics worldwide. ASML also faces issues in demand timing, with delays in the construction of chip making plants around the world that will require its devices.
The company last week was among leading decliners amid a selloff in European tech stocks after its biggest client Taiwan Semiconductor Manufacturing Co. trimmed its outlook for 2023 revenue, sending a warning to investors that the global electronics slump may persist for some time despite a boom in AI development. ASML shares are down 6% this month.
Societe General on Friday downgraded ASML to hold from buy in anticipation of a temporary slowdown, noting that “2024 may prove to be a complicated transition year for ASML, before growth resumes in 2025 against a backdrop of a strong industry-wide recovery.”
The tech firm charges about $180 million for its current top-end machine. Its next device, about the size of a small apartment, is set to hit markets in 2025. With a price tag of more than $380 million — costlier than a Boeing 787 Dreamliner — it will be capable of etching delicate patterns on silicon wafers smaller than a virus.
One concern for ASML has been the US bid to curb exports of cutting-edge technology to China, its third-biggest market. Pressure from President Joe Biden’s administration pushed the Dutch government last month to announce plans to prohibit ASML from shipping some so-called immersion DUV lithography machines, its second-most capable machinery, to China without a license. ASML is already prohibited from selling its most sophisticated EUV technology to Chinese companies.
But ASML said the measures won’t have a material impact on its China sales. It saw a recent surge in orders from the Asian nation, partly driven by customers seeking to avoid looming export controls. It has a €38 billion ($42 billion) order backlog and recently lifted its sales target for 2025 and beyond.
“The strong backlog of €38 billion supports such a growth outlook,” Citi analyst Amit Harchandani said in a note.
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–With assistance from Subrat Patnaik.
(Updates stock move and chart in Tech Chart of the Day section.)
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