ASML Holding Gains 13.9% YTD: What Should You Do Now?

ASML Holding's ASML shares have gained 13.9% year to date, underperforming the industry's return of 16.8% and the Zacks Computer & Technology sector's growth of 17.2%. This modest gain came amid a challenging macroeconomic environment.

The company's resilience can be attributed to its comprehensive product portfolio, which is aligned with customers' roadmaps, making it capable of delivering cost-effective solutions to support all kinds of applications. ASML's growing investments, expanding position in the memory market and increasing design wins have been positives.

However, market uncertainties, persistent inflation, geo-political tensions and the rising cost of technological innovations have been concerning for the company.

Increased pricing pressure due to rising competition from major industry players like Lam Research LRCX and Applied Materials AMAT is an added risk for ASML.

Year-to-Date Price Performance

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Given the combination of both risks and rewards, many investors may wonder how to play the ASML stock at present. In order to answer this, it is essential to delve into the details and analyze various factors at play.

Industry Trends Favoring ASML

The semiconductor industry is continuing its dream run so far this year. It is expected to accelerate its recovery journey in the second half of 2024, banking on the growing proliferation of artificial intelligence, especially generative AI. These factors bode well for the company.

Improving wafer fabrication equipment spending is a major positive from ASML.

Rising demand for advanced nodes to support the build-up of the digital infrastructure, including growth drivers such as 5G, AI and high-performance computing solutions, is a plus. As the technology nodes continue to shrink, the demand for the company's products continues to increase.

Global megatrends in the electronics industry are expected to continue fueling the company's growth in the semiconductor market.

Increasing lithography intensity is driving the demand for ASML products and services.

Factors to Drive Long-Term Growth

To capitalize on the above-mentioned industry trends, ASML is making solid investments both in capacity rampup and technology innovation, which bode well for its long-term prospects.

The company is improving lithography tool utilization levels at both logic and memory customers to address the growing memory demand. ASML expects growth in memory revenues for 2024 from that reported in 2023 on the back of DRAM technology node transitions, which are required to support advanced memories.

The company's increasing investments in Extreme Ultraviolet (EUV) infrastructure remain a plus. In second-quarter 2024, its net system bookings were EUR 5.6 billion, of which EUR 2.5 billion came from EUV bookings.

Strength in low numerical aperture (NA) and high NA machines is a positive. Based on this, the company expects EUV revenue growth in 2024. The rising uptake of the NXE:3800 low NA machine, which has the capability to deliver a robust performance with a productivity of 220 wafers per hour, is expected to contribute well to 2024 EUV sales. In regard to high NA, the rising shipment of 0.55 NA EUV is noteworthy.

Moreover, ASML is getting 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 fab capacity to meet current and future customer demand with the support of its supply-chain partners are positives.

Upward Estimate Revision

ASML is well-positioned to ride on the growing proliferation of AI, energy transition and global megatrends in the electronics industry on the back of its strong product portfolio and technology innovation. This, in turn, will benefit its long-term prospects.

The Zacks Consensus Estimate for 2024 revenues is pegged at $30.18 billion, indicating year-over-year growth of 1.3%.

The consensus mark for 2024 earnings stands at $20.30, suggesting a year-over-year decline of 5.7%. The estimate has been revised 0.9% upward over the past 30 days.

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End Note

Although the long-term prospects of this leading manufacturer of advanced technology systems for the semiconductor industry remain rosy, the uncertainties surrounding the company's growth trajectory are concerning.

End-market volatility and escalating U.S.-China tensions are negatives. The U.S. government is now reportedly planning to tighten restrictions on chip exports to China.

The company's mounting expenses associated with capacity rampup and technological innovation are expected to hurt its margin expansion. 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.

Moreover, ASML is currently trading at a premium, with a forward 12-month P/E of 32.68X compared with the industry's 27.27X, reflecting a stretched valuation.

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Given these headwinds, investors should not rush in to buy the stock at present. Instead, they should monitor the stock's developments closely for a more appropriate entry point, as an erroneous and hasty decision could affect portfolio gains.

Currently, ASML Holding carries a Zacks Rank #3 (Hold) at present.

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