I am neutral on ASML Holding (ASML), as the company’s significant growth momentum and potential and general backing from Wall Street analysts is offset by its massive valuation multiple premium relative to historic levels.
ASML is a Dutch global manufacturer of computer chipmaking equipment. The company was founded in 1984, and specializes in the development of photolithography system. (See Analysts’ Top Stocks on TipRanks)
Strengths
ASML is one of the world’s leading semiconductor companies, as well as the largest supplier of photolithography systems — machines that cost up to €150 million (approximately $172 million). It also has the distinction of being the only supplier of extreme ultraviolet lithography machines in the world.
The company has employed over 28,000 people from 120 countries, and operates with the help of a huge network of 5,000 suppliers. It has offices in the United States, France, Germany, Belgium, the United Kingdom, Italy, Netherlands, Japan, mainland China, Hong Kong, Singapore, Malaysia, South Korea, Singapore, Taiwan, and Israel.
Recent Results
ASML reported a Q3 net income of €1.7 billion ($1.98 billion), attributed to strong demand for its products and the global shortage of semiconductors. The results show better-than-expected income from the forecasted €1.6 billion. The income showed a significant increase year-over-year from €1.1 billion.
The third-quarter revenue was reported at €5.24 billion as compared to the €3.96 billion in the previous year. The company reported strong demand, and said that digital transformation and a shortage of chips have fueled the need to increase capacity to meet the demand for memory and logic chips.
The company expects fourth-quarter sales to be in the range of €4.9 billion to €5.2 billion with a gross margin of 51% to 52%. The company has a full fiscal-year target of 35% growth in sales.
In September, the company raised its long-term forecasts and issued full-year revenue guidance for 2025 in the range of €24 billion to €30 billion ($28 billion to $35 billion), with gross margin seeing a growth of up to 55%.
The company is expanding its manufacturing capacities to address the global chip shortage. ASML currently has a strong market capitalization of approximately €280 billion, making it Europe’s biggest technology company.
Valuation Metrics
ASML’s stock looks richly valued right now as its EV to forward EBITDA ratio is 38.9x, compared to its five-year average of 24.1x, and its forward P/E ratio is 45.4x compared to its five-year average of 31.5x.
Wall Street’s Take
From Wall Street analysts, ASML earns a Moderate Buy analyst consensus based on four Buy ratings, two Hold ratings, and zero Sell ratings in the past three months. Additionally, the average ASML price target of $911.39 puts the upside potential at 3.7%.
Summary and Conclusions
ASML operates in a high-growth and high-demand industry, and possesses a strong competitive position. Furthermore, Wall Street analysts are generally bullish on the stock, and the consensus price target does imply some upside over the next year. The company is expected to grow EBITDA by 54% this year and 20.4% in 2022, giving some justification to the rich valuation.
That said, the valuation multiple is currently nearly twice its historical average on an EV/EBITDA basis. As a result, investors might want to wait for a pullback in the share price to gain a bit more of a margin of safety before considering a purchase.
Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.
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