ASML Holding is a Great Buy but at a Cheaper Price

Key Points

• ASML Holding has a deep moat but rising competition could weaken its position. 
• Solid results were offset by weak guidance and have shares moving lower. 
• The dividend is healthy but unattractive with the stock trading at 30X earnings. 

ASML Holding NASDAQ: ASML is an excellent buy for AI exposure. It is the only manufacturer of advanced lithography technology to make the world’s most advanced chips. And the rise of AI is not the only driver for this business. The world is expanding its chip-making capabilities, including reshoring production in the US. 

There is a double tailwind for the ASML market, but investors face risks. Among them are budding competition, uncertain economic conditions, and geopolitical tensions that continue to worsen. The takeaway for investors is that ASML Holding is a great buy but at a lower price, and it looks like that price will be available soon. 

Competition Rising for ASML Holding

Canon boomed when it announced its latest entry into the semiconductor market. The company, best known for its optical and printing technology, launched the FPS-1200NZ2C to compete against ASML’s advanced lithography machines. Canon says its nanoimprint semiconductor manufacturing system is simpler and easier to use than ASML equipment, costing upwards of $200 million and being as large as a shipping container. 

The FPS-1200NZ2C is not a new technology. The nanoimprint system has been developing for decades but is only now coming to mass market. The technology is expected to lower costs for users due to its precision and ability to create multi-dimensional circuit patterns in a single step. The technology can easily reproduce a 5nm chip design, used in advanced process nodes, and will eventually be used to make chips as small as 2nm compared to today’s most advanced, which are 3nm. 

ASML Holdings Issues Tepid Guidance 

ASML Holding had a solid quarter with revenue of €6.7 billion, up 15.5% compared to next year. The company also produced a solid margin with earnings of €4.81, growing similarly. The bad news is that results are as expected and come with tepid guidance. The company reiterated its outlook for Q4 but cautioned that 2024 will be a transition year for the industry. 

Company execs see uncertainty and lingering inventory issues overshadowing the long-term outlook. In their view, 2024 will be flattish compared to 2023, which is about 500 basis points less revenue than the Marketbeat.com analysts' consensus is forecasting. Worse, the company expects gross margin to contract if ever so slightly. 

So, weak guidance, tepid results, increased competition, and high valuation put pressure on the market. This stock is trading at a high 29, going on 30X its earnings outlook to begin with, and the guidance for next year just undermined that outlook. Investors should expect to see price pressure for that reason alone, and the analysts aren’t helping. 

The consensus rating and price target are bullish for the market, but recent activity has aided the downdraft in price action. The Moderate Buy rating and consensus target are up compared to last year, but the most recent activity includes some notable downgrades and price target reductions. Those have the consensus moving lower compared to last quarter and last month, and that trend may continue now that guidance is in. 

ASML Dividend No Catalyst for Buyers

ASML has a healthy dividend, but the yield is small, near 1.0%, and risky given the stock valuation and technical outlook. The market is trending lower from a peak earlier this year and could break critical support. The stock price fell over 3% in early trading and is on the 150-day moving average. Momentum could build if the market fails to find support at this level and falls to a new low. In this scenario, shares of ASML could fall to the $500 level or lower before finding the price bottom.