ASML investors should focus solely on the long-term outlook.
ASML (ASML -0.22%) dealt with a slew of bad news when it announced its financial results for the second quarter of 2024. The maker of semiconductor manufacturing equipment faces declining revenue even as customers demand more of the world’s advanced chips.
That’s because restrictions on equipment sales to China reduce its revenue potential. Additionally, rhetoric from presidential candidate Donald Trump suggesting Taiwan may have to pay the U.S. for its defense stoked concerns about the chip manufacturing supply chain.
However, a lower stock price could actually benefit long-term investors despite these challenges. Here’s why.
The state of ASML
Admittedly, one can miss the forest for the trees when it comes to ASML. The company’s inability to sell its most advanced equipment to China has hurt the semiconductor stock. Also, since Taiwan accounts for approximately two-thirds of the world’s production, any regional turmoil bodes poorly for the company, at least on the surface.
Nonetheless, this may be good news for investors who seek a buying opportunity in ASML. For all of the concerns related to China and the surrounding region, the massive demand for artificial intelligence (AI) chips plays into ASML’s hands. Due to ASML’s technical lead in extreme ultraviolet (EUV) lithography, producing the world’s most advanced chips requires ASML’s equipment.
Moreover, the aforementioned industry concentration in Taiwan has stoked the fears of governments across the developed world. Consequently, they have begun to subsidize the construction of fabs in the U.S. and Europe to protect the supply chain from potential turmoil in East Asia.
Despite heavy investments in East Asia, Taiwan Semiconductor Manufacturing and Samsung are not immune to these fears and are building fabs in the U.S. and receiving subsidies from the U.S. CHIPS Act.
Another company receiving subsidies is Intel. Intel benefits in one sense since most of its production capacity is outside East Asia. Additionally, in a bid to reclaim the technical lead, it has become a major buyer of ASML’s High-NA EUV machines, which is its most technically advanced product.
Such trends will likely draw business to ASML for the next few years. Additionally, analysts had already predicted that 2024 would be a slower-growth year for ASML, which could make the buying opportunity more lucrative.
ASML’s financials
Still, in 2024, lower client spending prompted ASML to forecast a “pause” in demand, and that seems to have turned into a pullback. In the first six months of 2024, ASML reported revenue of just under 12 billion euros ($13 billion), a 15% decrease from year-ago levels. That caused profits to fall 28% from a year earlier to 2.8 billion euros ($3.1 billion).
For Q3, ASML expects to bring in between 6.7 billion euros ($7.3 billion) and 7.3 billion euros ($8 billion) in revenue. This will amount to only modest growth as the company reported revenue of 6.7 billion euros in the third quarter of 2023.
Despite the sluggish financial performance, the stock remains in an uptrend. Even with the recent pullback, ASML rose by around 20% over the last year. Yet, the stock remains relatively expensive, with its P/E ratio of 49 above the five-year average of 43.
Admittedly, the earnings multiple rarely falls below 30, but history indicates the valuation could become cheaper. Still, the multiple will probably fall once the so-called pause ends. Hence, investors can feel comfortable adding shares amid the recent pullback.
Consider ASML
Despite current challenges, ASML stock should benefit investors in the longer-term. Since it makes the machines that build the world’s most advanced chips, it is an irreplaceable part of the supply chain for the world’s most advanced semiconductors. With the lower share prices caused by its current difficulties, investors can buy ASML at a significant discount.
Indeed, turmoil related to East Asia and temporarily slower business may weigh on the stock for now. However, the need for AI chips and the desire to move manufacturing away from East Asia are tailwinds that should bolster ASML and its shareholders for years to come.
Will Healy has positions in Intel. The Motley Fool has positions in and recommends ASML and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel and short August 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.