Over the past decade, semiconductor manufacturing equipment manufacturer ASML has (NASDAQ: ASML) was a big winner, producing a total return of 761% versus the S&P 500’s 270%. But this month has been a tough one. The stock has fallen 18% since the company’s latest earnings report in mid-October, a reaction to both earnings and guidance that fell short of analysts’ expectations.
Almost a year’s worth of ASML’s profits were wiped out after the decline, and the stock price returned to early 2024 levels. The question investors are asking is: Is this a buying opportunity, or is the market’s reaction justified? Future outlook for financial conditions.
Let’s see if ASML is a buy before the stock price recovers.
Here, the rush into artificial intelligence (AI) is injecting billions of dollars of capital into the development of cutting-edge chips that can power the large-scale language models behind AI chatbots like ChatGPT. Semiconductors have been a top priority for investors for several years. . While companies like Nvidia have garnered the most headlines, ASML enables the entire chip manufacturing process.
To oversimplify, ASML creates a machine that manufactures chips. When it comes to cutting-edge chip manufacturing, ASML is the only company in the world that manufactures the extreme ultraviolet lithography equipment needed to manufacture the chips that support cutting-edge technology.
ASML’s headline performance for Q3 2024 was not bad. Revenue increased 12% year over year, beating the company’s guidance, and earnings per share increased 10%. However, net bookings increased by 1% to 2.6 billion euros. ASML does not provide guidance on bookings, but analysts covering the company had expected 5.6 billion euros. When there is such a wide disconnect between expectations and reality, stock prices often pay the price.
Bookings is an important metric for ASML as it captures all sales that have received written approval. Basically, in addition to current earnings, expected future earnings are also taken into account. Management addressed this on the earnings call, noting that market conditions include customers remaining cautious and slow in making purchasing decisions. While the company had expected 2025 to be the year it returned to growth, it looks like some of the challenges facing ASML will continue into next year.
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The stock market reaction may indicate that investors are less anxious for a return to growth than they were a few weeks ago. However, some context is worth mentioning. At its 2022 investor day, ASML predicted 2025 sales of between 30 billion euros and 40 billion euros. The company currently expects the amount to be at the lower end of the range, between 30 billion euros and 35 billion euros.
Even if customer recovery is slower than expected, 2025 revenue should still be within the range predicted almost two years ago. This suggests that management has a fairly clear picture of how it will perform in the years ahead. This is worth watching over the next few quarters. If the 2025 earnings forecast is revised downward again, it would mean a further delay in the growth recovery and could lead to further declines in stock prices.
Over the long term, it’s hard to argue that ASML won’t be a more valuable company in the future than it is today. However, due to the cyclical nature of the semiconductor industry, investors need to anticipate when stock prices will decline.
Even after the drop in earnings, ASML’s stock still trades at a price-to-earnings ratio of 38 times, so it doesn’t seem cheap. However, consider how today’s valuation compares to the long-term median P/E ratio.
ASML PE ratio chart
Historically, ASML stock may be cheaper than it has been for some time. On the other hand, there is enough uncertainty in the coming quarters that there could be even more attractive buying opportunities.
While it may make sense to add to or initiate positions at today’s prices, ASML is taking time to look at opportunities as near-term challenges present compelling valuations. I think it’s the type of stock to add.
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Jeff Santoro holds positions at ASML and Nvidia. The Motley Fool has a position in and recommends ASML and Nvidia. The Motley Fool has a disclosure policy.
This semiconductor stock just fell 18%. Should you buy before it recovers? Originally published by The Motley Fool
