Why ASML Holding Stock Rallied Tuesday Morning

The Motley Fool · 2d ago

Shares of ASML Holding (NASDAQ: ASML) charged sharply higher on Tuesday, jumping as much as 5%. As of 12:54 p.m. ET, the stock was still up 3.2%.

The catalyst that sent the chipmaking equipment provider higher was robust sales from one of the company's biggest customers.

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The ASML logo superimposed over an image of one of the company's lithography systems.

Image source: The Motley Fool.

Positive news

ASML manufactures and sells the photolithography systems used to create the world's most advanced semiconductors. The advent of artificial intelligence (AI) has been a significant catalyst for the company, sparking a boom for foundries and chipmakers alike.

Taiwan Semiconductor Manufacturing (NYSE: TSM), commonly known as TSMC, is one of ASML's biggest customers, as the premier manufacturer of the world's most advanced AI chips. The company reports monthly sales numbers, and the latest figures provided insight into the state of demand -- and the news was good.

For the month of July, TSMC reported net revenue of NT$467.58 billion (roughly $14.5 billion), up 44.7% year over year and up 5.6% sequentially. This suggests the company is on track to exceed Wall Street's quarterly revenue consensus of NT$1.45 trillion, as July is historically a slower sales month.

Strong demand for TSMC's chips generally translates to robust sales of ASML's systems, as ASML has a near-monopoly on the extreme ultraviolet (EUV) lithography systems that produce the most advanced AI chips -- and as the world's largest contract chipmaker, TSMC is ASML's largest and most important customer.

The news comes just weeks after ASML reported better-than-expected second-quarter results, which not only crushed Wall Street's expectations but exceeded the high end of management's guidance range. At the time, CEO Christophe Fouquet cited "ongoing AI-related investments" for driving the stellar results.

ASML's valuation might be a deal breaker for some investors. The stock currently sells for 30 times next year's expected earnings, which is certainly pricey. However, ASML's near-monopoly on the EUV lithography systems that produce the most advanced AI chips -- and its track record of execution -- illustrate why it deserves a premium.

Danny Vena, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.