ASML Stock Remains Expensive (NASDAQ:ASML)

Investment Thesis

As an equipment provider, ASML (NASDAQ:ASML) supplies all major semiconductor manufacturing companies, making the company akin to a semiconductor ETF. In addition, though, ASML also has several company-specific growth drivers, such as improved and new tools.

Given this diversified business in a growth industry, and track record of growth, the stock is valued quite expensively. (The stock was on sale in October, and has rallied strongly since.) So overall, while the stock may not provide the greatest returns, its relatively low risk and substantial revenue growth opportunity, combined with a valuation that has compressed to a more reasonable mid-30s P/E multiple, makes me upgrade the stock to (long-term) buy.

Background

ASML is the market leader in lithography (litho) tools, an essential piece of equipment used in the manufacturing of semiconductor chips. Its (revenue) lead only widened with the introduction of EUV (extreme ultraviolet light, 13.5nm wavelength), which gained steam around 2020 with TSMC’s (TSM) N5, followed by Samsung (OTCPK:SSNLF) and soon Intel (INTC).

In general, ASML is on a long-term growth trajectory because the overall semiconductor market is still growing, requiring more fabs (and hence more litho tools). In addition, ASML has a roadmap to improve its existing products, which results in higher prices as the tools’ value increases for its customers.

This was reflected in my thesis in my last coverage of ASML, in late 2021: ASML: The Stock Isn’t As Great As The Company. However, while ASML is on a path of long-term growth, I argued this was already reflected in the stock price. Indeed, with a price at publication of $750, and recording an all-time high over $800 around that period, the stock has since seen a significant correction to the downside, and has only recently been reversing some of those declines.

Q4 results and guidance

Revenue of EUR6.4B marked a 29% increase, with gross margin of 51.5%. The long-term revenue trend is shown below.

For 2023, ASML expects to maintain a similar growth trend, with guidance for 25% growth. For investors, the most crucial information is that ASML is confident in this forecast (in spite of the current semiconductor downturn) based on a few factors.

Primarily, the downturn is not expected to last very long, and will be shorter than ASML’s lead time (which for EUV is around 18 months), with a recovery expected in the second half of 2023. As such, customers are not significantly adjusting their orders. Note that ASML had and has been supply constraint anyway, so at best this downturn is giving ASML an opportunity to work through its backlog, which has reached around EUR 40B, which ASML said is about twice of what it plans to ship this year.

Product updates

There have not been significant updates. The timeline of high-NA EUV (the next-gen tool) is unchanged, and the same goes for the next update of the current EUV tool, with the E model (up from D) expected to ship by the end of the year. The productivity is improved from 160 to (eventually) 220 wafers per hour, which is a 37.5% increase.

ASML has reaffirmed that the correlation between productivity and pricing will remain quite linear, so this suggests the ASP (average selling price) could increase from $165-170M to $227-234M. ASML also cautioned, however, that since the tool is more advanced, the cost (of goods sold) will also increase, but the overall gross margin of the E model should increase.

This means that even without any further increase in shipments, the transition to the E model in 2024 should cause a sizeable uplift in revenue. On one hand, obviously if a customer needs to reach a certain throughput in the fab, the higher productivity of the E model means that the customer would need to buy less E tools than D tools. On the other hand, ASML has indicated it is still supply constraint, so shipping the same amount of E tools instead of D tools would increase EUV revenue by around 40%.

Shipment updates and long-term revenue

The shipment roadmap also remains unchanged. In 2022, ASML shipped 54 systems while recognizing revenue for 40. For 2023, ASML said: “We’re planning to ship around 60 EUV systems and around 375 deep UV systems in 2023, with around 25% of the deep UV systems to be immersion.”

For the long-term, the plan remains “600 deep UV, 90 EUV low-NA systems by 2025-’26 and 20 EUV high-NA systems by ’27-’28”.

Obviously, going from 60 shipments in 2023 (or 40 systems for revenue) to 90 is a 50% increase, with ASP upside likely also on the order of 50% going from the D to the F model. According to a simple calculation, using a $250M price for low-NA and $400M for the high-NA model, then the revenue opportunity for EUV alone is $30B. For comparison, in 2022, EUV represented 46% of revenue, although this value is likely to increase further over time as EUV continues to grow above the corporate average.

ASML’s official revenue model is to reach 30 to 40 billion euros by 2025 and 44 to 60 billion euros by 2030. ASML has revised its forecast upward since my previous coverage, as back then the expectation was to reach around 40 billion euros by 2030.

Stock, valuation and risks

ASML has been a prime beneficiary of the semiconductor boom. The stock has benefited from both EPS and P/E expansion. As such, the stock has been trading sideways (at best) for the last year, absorbing its high valuation. If not for the rally in the last few months, the stock would have been down by around 50% from its ATH (all-time high).

ASML is currently valued at a $275B market cap with a 37x current and 33x forward P/E multiple. This compares to a TTM (trailing twelve month) multiple of over 50x during pretty much all of 2021.

How expensive one would consider this valuation depends on stock one would compare it to, but certainly it can’t be considered cheap, especially given that the period of a zero-interest rate environment is generally considered to be over.

On the other hand, there is a reason the shares are expensive, which is the quality of the company. As noted, ASML sees a path to up to 60-billion-euro revenue by 2030. As ASML supplies to all semiconductor manufacturing companies, the company could be seen as ETF for the overall semiconductor industry, benefiting both from its general growth as well from additional growth due to company-specific growth drivers such as the upcoming high-NA tool.

The main risk is if the current downturn lasts longer than expected with a weaker recovery than expected, since ASML’s 2030 revenue is based on forecasts for the semiconductor industry to reach around $1T in size. While there are certainly drivers to support such growth, it still marks a nearly doubling from its size in 2020, in just a decade.

Investor Takeaway

Overall, with reasonable (and reasonably low risk) growth expected for a long time to come, the company certainly warrants a premium valuation, which it is unlikely to lose completely. With the valuation having normalized from its extended levels in 2021, the stock is becoming a clearer recommendation for very long-term investors who prefer relatively low-risk investments.

While the stock’s alpha in the next decade most likely will not match that of the last decade, the strong 2023 guidance (supported by a strong backlog) at least cushions against severe downside in 2023, which is expected to be a weaker year for semiconductors. Nevertheless, due to the strong rally since the October low of ~$400, the bullish recommendation isn’t as firm as it might have been a few months ago.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.