This drop could be considered a great buying opportunity.
As almost every investor already knows, artificial intelligence (AI) has been driving the current bull market since its inception in 2023.
The launch of OpenAI’s ChatGPT begins a new arms race in the industry, with generative AI technology potentially as transformative as the internet. Stocks with exposure to artificial intelligence, such as the semiconductor sector, have generally performed well, but some have performed better than others.
Nvidia, for example, just hit a new all-time high on a surge in demand for its new Blackwell platform, but all AI stocks haven’t kept up with the Nasdaq Composite Index, which hit a near all-time high earlier this week. In fact, ASML (ASML 3.23%) is currently down 34% from its peak earlier this year after the industry bellwether gave a disappointing outlook in its third-quarter earnings report on Tuesday. The stock price fell 16.3% on the news.
Image source: Getty Images.
Why ASML stock is on sale
ASML holds a unique position in the semiconductor industry as the only manufacturer of extreme ultraviolet (EUV) lithography machines used to manufacture cutting-edge, smallest-node chips.
Investors have been hoping for a recovery in ASML’s business, which was previously depressed due to macro challenges such as high interest rates and inflation.
ASML is expected to benefit from the expansion of chip factories around the world as governments and industry prepare for the AI era. For example, the United States plans to invest tens of billions of dollars in foundry construction through the CHIPS Act, and Taiwan Semiconductor, the world’s largest foundry operator, is looking to diversify away from Taiwan and get closer to its customers. There is.
In what should be a boost for ASML, the company just told customers that recovery will take longer than expected. Chief Executive Officer Christophe Fouquet cited weakness in both the logic and memory divisions, which make up two of the three business units. ” he said. He also pointed to the cautiousness of customers.
ASML has increased its 2025 revenue forecast from 30 billion to 40 billion euros ($33 billion to $43 billion) to 30 billion to 35 billion euros ($33 billion to $38 billion) at its 2022 Investor Day. I pulled it down. Understandably, investors were disappointed by this news.
Why is it a buying opportunity?
Companies tend to release disappointing earnings reports and earnings estimates for one of two reasons. Either there are difficult market conditions at a macro or sector level, or the company itself is underperforming and falling behind its competitors.
The ASML case seems to fall safely into the first category. There’s a lot of excitement about AI, and executives agree, but there are still some challenges in the legacy chip business, as seen by major customers like Intel and Samsung struggling .
Samsung is reportedly slowing mass production at its Texas factory due to low yields on its 3-nanometer process, and Intel just recently announced a major restructuring, casting doubt on its foundry expansion. . In recent quarters, as much as half of ASML’s revenue has come from China, where the economy has been depressed since the end of the pandemic.
For comparison, a good recent example of a company that suffered similar headwinds was Alphabet as digital advertising slowed in 2022 due to recession concerns, as you can see in the chart below.
GOOGL data by YCharts.
As you can see, revenue growth fell to just 1% in the fourth quarter of 2022, but if you had bought the stock at that time, it would now be up over 80%.
As the sole manufacturer of EUV lithography equipment, ASML maintains a significant competitive advantage and should ultimately benefit from the upcoming AI-driven chip production boom.
Despite the dialed-down guidance, the company still calls for 16.1% growth at the midpoint and expects gross margin and operating margin expansion.
With earnings rebounding and a weaker outlook priced in, the stock now looks like a good bet for a recovery. With its proprietary EUV technology, high profit margins, and growing demand for AI, ASML looks like a great bet to be a long-term winner this semester.
Alphabet executive Suzanne Frye is a member of The Motley Fool’s board of directors. Jeremy Bowman has no position in any stocks mentioned. The Motley Fool has positions in and recommends ASML, Alphabet, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: November 2024 $24 short calls on Intel. The Motley Fool has a disclosure policy.
