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ASML Expects Big Things to Come in Semiconductors
Stock Analysis & Ideas

ASML Expects Big Things to Come in Semiconductors

Semiconductor manufacturing equipment maker ASML (ASML) has an excellent point regarding its value proposition.

With a shortage of semiconductors still going strong, ASML believes that its own sales should skyrocket in the near term. So much so in fact, that it’s raised its long term outlook. It’s hard not to be bullish on ASML as a result, and I certainly am.

ASML stock has spent the last year in a fairly steady climb with some bumps along the way. (See ASML stock charts on TipRanks)

Things are actually looking up for ASML from here, as the company expects to see consistent annual growth all the way through 2030.

It also expects to see that growth come in around 11%. The company’s CEO, Peter Wennink, even went so far as to suggest that these numbers were pessimistic. They don’t include possible extra demand from three major worldwide markets — China, Europe, and the United States — based on an increased push in those regions for “technological sovereignty.”

Should those pushes fall flat, the numbers already projected could increase further.

ASML upgraded its revenue estimate to between €24 billion and €30 billio — about $27.8 billion to $34.8 billion. Earlier forecasts called for the company to bring in between €15 billion and €24 billion.

Wall Street’s Take

Wall Street consensus analysis calls ASML a Strong Buy. Based on the four analysts that have 12-month price targets on ASML, three of them call the company a Buy, while one assigns a Hold rating.

The average ASML price target is $921.89, implying 26.1% upside potential.

Selling Shovels in a Gold Rush

There’s an old maxim about how the only people who really got rich in the gold rush weren’t the miners — though some undoubtedly did — but rather the people who sold supplies to the miners.

They did smaller business each day, certainly, but they did business every day. Soon, the people who sold beans and shovels did better on average than the people pursuing the gold.

ASML isn’t too far different. There’s a semiconductor shortage right now. ASML may not sell chips itself, but what it does are sell the means to make chips. For all those semiconductor companies out there that want to ramp up production and meet the spiraling demand for processors, they’re going to need to turn to companies like ASML.

There is a bit of a caveat in this, though. The natural progression says that ASML’s business should blast upward on the strength of massive semiconductor demand.

However, since ASML itself doesn’t offer semiconductors, rather the tools to make them, ASML’s success depends on current semiconductor makers expanding their current production lines. Given the ongoing labor shortage, that’s not as clear-cut a proposition as one might think.

We’ve already seen some expansion happen, though. Both Samsung and Taiwan Semiconductor Manufacturing (TSM) have already made upgrades. TSM itself plans to spend $100 billion over the next three years just to step up its production.

Concluding Views

ASML’s optimistic projections depend on two things. One, the chip shortage has to continue for the foreseeable future. Two, chip makers have to be ready to expand their production lines to meet the growing demand.

The demand may not be as sustainable as ASML projects. The company will likely be able to ride at least some upward momentum for the next few months. Even if the overall result isn’t as good as ASML hopes, it’s still going to produce value for shareholders.

Disclosure: At the time of publication, Steve Anderson did not have a position in any of the securities mentioned in this article.

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