ASML Holding: A Correction That Might Signal Opportunity

Key Points

• ASML Holding N.V., a semiconductor industry leader specializing in EUV lithography, is down 35% from its 52-week high despite topping estimates in its last two quarters.
• The recent decline followed ASML's Q3 guidance, which forecasted 2024 revenue between €30 billion and €40 billion, marking a midpoint decrease of 7% from prior estimates.
• The company's unrivaled technology, essential for AI and chip advancements, positions it as a monopolistic powerhouse in the semiconductor supply chain.

ASML Holding N.V. NASDAQ: ASML, a semiconductor giant specializing in advanced equipment systems, might be beginning to catch the attention of savvy investors. Despite topping estimates in the last two quarters, the $280 billion company is in correction territory, down 35% from its 52-week high and 5.61% year-to-date. While the recent decline may appear concerning, it could present a compelling value opportunity within a thriving industry despite short-term setbacks. With analysts maintaining optimistic price targets, now might be the perfect time to consider ASML ahead of the new year.

The Largest Tech Company You May Not Know

Headquartered in the Netherlands, ASML is one of Europe’s largest technology firms and arguably one of the most influential companies in the semiconductor supply chain. While it doesn’t have the same name recognition as NVIDIA NASDAQ: NVDA or Advanced Micro Devices NASDAQ: AMD, its cutting-edge lithography equipment plays a vital role in modern semiconductor manufacturing.

ASML is the sole producer of extreme ultraviolet (EUV) lithography machines, a technology essential for creating microchips powering AI advancements, smartphones, and data centers. Without ASML’s equipment, the tech world would lack the tools for its rapid progression. This unique position makes ASML indispensable to the semiconductor industry, effectively maintaining a monopoly in its niche.

Recent Weakness Following Strong Results

ASML’s Q3 earnings report initially looked positive, beating the company's revenue and earnings per share estimates. However, weak guidance overshadowed these results, sending the stock down nearly 20% in the days following.

The company now projects 2024 revenue between €30 billion and €40 billion, a midpoint decline of 7% compared to previous estimates. Future revenue, measured by bookings, also fell short of expectations at $2.8 billion, 53% below forecasts. This shortfall reflects weakness in broader semiconductor demand, with delays in orders for logic chips and limited capacity expansion for memory chips.

Still, ASML’s management emphasized its long-term growth potential remains intact, framing these challenges as temporary setbacks.

A Potential Value Play

At first glance, ASML’s current price-to-earnings (P/E) ratio of 37.45 might appear expensive, but its forward P/E of 28.21 signals a more attractive valuation relative to future earnings potential. The forward P/E now sits below its 10-year median, indicating that the stock may be undervalued.

Technically, ASML is attempting to stabilize after finding support for nearly $640. The stock is forming a higher low, with its 50-day and 20-day moving averages converging, potentially signaling a bottom.

From a broader valuation perspective, ASML’s price-to-sales (P/S) ratio of 9.88 and current ratio of 1.55 further suggest financial health and liquidity, positioning it well for a rebound once market sentiment shifts.

Analysts Remain Bullish

Despite recent headwinds, Wall Street continues to see significant upside in ASML’s stock. Based on fifteen analyst ratings, the stock has a Moderate Buy rating, with an average price target of $943.83, implying a potential 32% upside from current levels. BNP Paribas recently initiated coverage with an Outperform rating and a price target of $858, reflecting strong confidence in the company’s fundamentals.

ASML’s recent correction has undoubtedly shaken investor confidence, but its essential role in the semiconductor industry, coupled with a historically low valuation, makes it an intriguing value play. As analysts continue to back the stock with lofty price targets, investors might find this pullback an opportune moment to acquire shares of ASML before the new year brings potential recovery.