ASML: Is it too late to buy this top semiconductor equipment manufacturer?

For those who are unaware, ASML $ASML Holding NV(ASML)$  is undoubtedly one of the most important companies in the world, one whose product the world cannot do without.

ASML is a company that operates in the semiconductor industry, one of the hottest industries in terms of price performance on a YTD 2023 basis.

I have recently written an article on the best-performing industries in 2023. While the semiconductor industry wasn’t featured in the Top 5 best-performing industries as of 1 Feb 2023, this industry has continued to outperform peers and is currently ranked #6 in the list (do check out the latest ranking list in the segment below).

However, unlike semiconductor household names such as Nvidia, Intel, AMD, and TSMC, etc, investors might not have heard of this Dutch company, one which has gained the reputation of being the top semiconductor equipment manufacturer in the world.

What is so special about ASML that the world cannot do without it?

For one, the company is a key semiconductor equipment supplier to THE largest chip manufacturer in the world, TSMC.

TSMC relies on ASML’s lithography machines to produce some of the most advanced chips that are currently deployed in our daily products, such as the iPhone 14.

And ASML is the ONLY company that has the technology to produce high-end EUV lithography systems at present.

That is why the company is so special, one which the ever-changing tech world cannot do without if it wishes to progress.

Strong 4Q22 Quarterly Performance

The company beat the street’s expectations in its recent 4Q22 earnings announcement. Of more importance is management’s 2023 sales guidance, where they expect the company to see a 25% sales rise in 2023, despite export curbs to China.

Source: ASML

The company has been growing its sales steadily since 2018 and the relatively rosy 2023 sales forecast is backed by a strong order backlog of about $45bn, which is about 2 years of sales.

Order backlog has been strong because key chip manufacturers such as TSMC, Intel, Samsung, etc are all dependent on ASML’s complex lithography machines to produce their advanced chips.

And those customers are not willing to cut back on their orders, given that the wait time (for new orders) right now could stretch beyond 2 years, a duration longer than the expected length of the “widely-expected” 2023 recession.

Hence, these chip manufacturers need to ensure that they have the equipment machines in place for the subsequent economic rebound.

Impact of the export ban on China

Recent news has reinforced the possible ban on exports of key advanced semiconductor equipment from ASML to China.

However, this export ban is likely limited to some of the most advanced lithography equipment, while less advanced tools can still be sold to China.

This is why ASML has guided that the overall impact on its backlog is limited to approx. 5%, on the assumption that the Chinese are willing to import its lower-end DUV tools.

However, there might be other implications stemming from this export ban to China. For example, Samsung has recently highlighted that if the China export ban is to take effect, its factories operating out of China might no longer have access to ASML’s EUV lithography machines and that would directly impact ASML’s sales (not just to Chinese entities).

ASML’sValuations

Source: Stock Rover

With a current trailing Price to Earnings ratio of 43x, ASML is trading at approx. its 10-year average level.

However, as compared to its peers’ average in the 20-25x P/E multiples region, it is still trading at a premium, which the counter has always been doing so.

Source: Stock Rover

One of the strongest industries in 2023

The semiconductor equipment manufacturers industry has been one of the strongest industries in 2023, with YTD returns of approx. +25.2% (as of 6 Feb 2023).

The table below shows the Top 20 strongest-performing industries in 2023 on a YTD basis (exclude industries with < 5 names)

Source: market chameleon

While the overall chip industry is not yet out of the woods, it is heading in the right direction with the reopening of China and the recent buzz over artificial intelligence (AI) with everyone talking about the wonders of ChatGPT.

So, does it make sense to be buying into one of the most important companies in the world today?

Too late to buy this top semiconductor equipment manufacturer?

I have brought this counter to my Stock Alpha Blueprint (SAB) Students’ attention back in October 2022 when the counter appeared on my screening list as a high-quality stock that has fallen into value territory.

When everyone was feeling fearful of buying semiconductor stocks at that instance, I was all ready to pounce on the opportunity to buy into this high-quality blue-chip name, trading them at a discount.

I subsequently average up two more times on this counter to capitalize on the counter’s positive price momentum.

With the counter currently trading at US$670/share, it is up 77% from my initial purchase back in October 2022 and up approx. 48% of my average cost.

ASML, unfortunately, is no longer what I deem as a value purchase at its current price level, after taking into consideration the stock’s fundamentals. That is, however, not to say that its price cannot continue appreciating.

In a bull market, a strong stock like ASML can continue to show price appreciation and become temporarily overvalued (not to say that it is at that level now). A premature exit because of the stock no longer being a “value counter” could result in a loss of “opportunity costs” when the stock maintains its upward price trajectory.

Hence, I will be waiting for the signal showing a loss in price momentum as the trigger point to exit and lock in my profits in ASML.

Should you be buying ASML now?

The short answer is NO. While the company remains a high-quality counter with strong revenue/earnings visibility over the next 2 years, it is no longer trading in what I deemed as value territory.

Investors/traders who wish to enter now need to be extremely nimble in managing their position, ie be quick to cut loss when the price momentum dies off.

On the other hand, there is another top blue-chip semiconductor stock that is currently worth a closer look, that my Alpha Blueprint students have been alerted to, a couple of weeks back. While the counter has already appreciated by 9% (over just 2 weeks), this Warren Buffett stock could just be at the start of a multi-year bull run.

To read more of such articles, do head over to New Academy of Finance.

@Tigerstars

@CaptainTiger

@MillionaireTiger