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Wall Street JournalASML Dips 10.4% in 6 Months: Should You Hold or Fold the Stock?
ASML Holding’s ASML shares have lost 10.4% in the past six months compared with the industry’s decline of 10.9%. The ASML stock has underperformed the Zacks Computer and Technology sector and the S&P 500’s growth of 9.3% each in the same time frame. Given the significant pullback in ASML Holding’s shares, investors might be tempted to snap up the stock. But is this the right time to buy ASML? Let us find out.
The bearishness in the stock is majorly due to the underlying challenges in the semiconductor industry, as reflected by the recent sell-off. Escalating tensions between the United States and China have been detrimental to the semiconductor industry’s prospects. Tightening U.S. restrictions on high-tech exports to China, particularly advanced AI chips, have been a negative.
Not only ASML Holding but major players like Lam Research LRCX and Applied Materials AMAT have also seen their stocks plummet 8.2% and 18.8% in the past six months, respectively.
Six-Month Price Performance
Image Source: Zacks Investment Research
Market uncertainties, persistent inflation, geo-political tensions and the rising cost of technological innovations have been concerning for ASML Holding.
ASML Trades Below 50-Day Moving Average
Adding to investors’ concerns, ASML shares have dipped below their 50-day moving average, a technical indicator often seen as a bearish signal. This movement suggests the continuation of the downward trend, at least in the short term.
Image Source: Zacks Investment Research
ASML Stock is Overvalued
Despite the downside in its share price, ASML Holding is trading at a forward 12-month Price/Earnings multiple of 30.27X, an 18.9% premium to the industry’s average of 25.45X. A stretched valuation indicates that investors should wait for a better entry point.
Image Source: Zacks Investment Research
Technology Innovation to Drive ASML’s Prospects
The semiconductor industry has been staging a solid rebound on the growing demand for artificial intelligence (AI). This has been a positive for wafer fab equipment, which, in turn, bodes well for ASML.
The increasing adoption of advanced nodes for supporting the build-up of the digital infrastructure, including growth drivers such as 5G, AI and high-performance computing solutions, is bolstering the demand for ASML Holding’s products. As the technology nodes continue to shrink, the demand for the company’s products continues to increase.
Increased memory demand, thanks to the DRAM technology node transitions in support of advanced DDR5 memory and high-bandwidth memory (HBM), is a tailwind for the company.
Improvements in lithography tool utilization levels at both logic and memory customers are major positives.
ASML Holdings is well-poised to capitalize on the above-mentioned trends on the back of its growing investments in technology innovation.
The company’s increasing investments in Extreme Ultraviolet (EUV) infrastructure are noteworthy. The service business of ASML is performing well, fueled by the increasing contribution of EUV services.
Growing momentum in low numerical aperture (NA) and high NA machines is benefiting the company’s Installed Base business. The rising uptake of the NXE:3800 low NA machine, which can deliver robust performance with a productivity of 220 wafers per hour, is driving growth in ASML’s EUV sales.
NXE:3800 also comes with imaging and overlay improvements, which make it ideal for memory and logic-advanced nodes.
ASML Holding has orders from a number of new fabs being constructed across the world. Management expects a better second half of 2024 and a cyclical upturn for 2025. ASML’s growing efforts to add and improve capacity to meet current and future customer demand with the support of its supply-chain partners are other positives.
Long-Term Projections of ASML
The company’s strategic investments along with its comprehensive product portfolio which is aligned with customers’ roadmaps, making it capable of delivering cost-effective solutions to support all kinds of applications, are expected to benefit its long-term prospects.
However, sluggish top-line growth is expected due to prevailing macroeconomic headwinds.
The Zacks Consensus Estimate for 2024 revenues is pegged at $30.18 billion, indicating year-over-year growth of 1.25%.
The consensus mark for 2024 earnings stands at $20.30 per share, suggesting a year-over-year decline of 5.7%. The estimate has been unchanged over the past 30 days.
The company’s mounting expenses associated with capacity rampup and technological innovation are expected to keep its margin under pressure. It expects a lower gross margin for 2024 than that reported in 2023 due to increasing high NA costs.
Weakening momentum in logic does not bode well for ASML. The company expects lower logic revenues this year than that reported last year.
Increased pricing pressures due to rising competition from Lam Research and Applied Materials are added risks for ASML.
Conclusion
For those wondering how to play the ASML stock, a nuanced approach may be warranted. While the company’s long-term prospects are promising as the semiconductor industry continues to regain momentum, investors should not rush in to buy the stock.
ASML’s slowing sales growth, stretched valuation and rising competition are significant concerns. Investors should keep an eye on the company’s ability to navigate these challenges.
Currently, ASML carries a Zacks Rank #3 (Hold) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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ASML Holding N.V. (ASML): Free Stock Analysis Report
Lam Research Corporation (LRCX): Free Stock Analysis Report
Applied Materials, Inc. (AMAT): Free Stock Analysis Report