It would require a more than 3x appreciation of the market cap in a little more than five years.
The trillion-dollar market cap milestone has become the modern barometer for judging whether a stock is a mega-cap company. Maybe we are collectively focused too much on round numbers, but it is undoubtedly an impressive feat when a company has a market value with four commas in it. There are currently seven non-state-owned companies with a market cap above $1 trillion, and two that have surpassed the market before but have since fallen under the threshold. It is still a rarified club looking for its 10th member.
Many investors focus on companies that have already surpassed the trillion-dollar milestone. But smart investors know the past doesn’t deliver you stock returns. It is the future that matters. Finding the next stock to hit a market cap of $1 trillion could deliver strong returns for your portfolio. I think semiconductor equipment company ASML (ASML 0.32%) is a prime candidate, with a market cap of $285 billion today. It is currently the 31st largest company in the world by market cap, but growing quickly with massive industry tailwinds at its back.
Will the stock surpass a market cap of $1 trillion by 2030? Let’s dig into the numbers and find out.
Riding the AI tailwind
ASML focuses on building semiconductor equipment machines for manufacturers of computer chips. Specifically, it focuses on lithography machines, which help print transistors on computer chips only a few nanometers apart. Its extreme ultraviolet lithography (EUV) machines are the most advanced in the world and the key to companies such as Taiwan Semiconductor Manufacturing being able to build advanced semiconductors.
These semiconductors are then sold to numerous end markets such as smartphones or data centers for artificial intelligence (AI). What this means is that the more demand for advanced semiconductors grows, the more EUV and other ASML machines are needed in factories around the world. ASML’s revenue has grown a cumulative 266% over the past 10 years.
With the growing demand for advanced computer chips to support AI, this revenue should keep growing over the next 10 years as well. Sales for the company were around 7.5 billion euros last quarter, up from 6.2 billion euros a year ago. New customer bookings were weak, but this was just one period and not overly concerning. Over the long term, ASML has shown a lot of skill in growing its orders and getting more of its machines out to customers.
Putting the numbers to the test
The company clearly has a good business model, but is it ready to zoom higher to a market cap of $1 trillion by 2030, or around five years from now? Let’s put the numbers to the test. Currently, ASML generates a net income of $7.5 billion. To get to a market cap of $1 trillion, I think it needs to generate at least $25 billion in net income, which would give the stock a price-to-earnings ratio (P/E) of 40 at a trillion-dollar market cap. A P/E of 40 is still expensive, but not out of the question for ASML, which has an average P/E of 37 over the last 10 years.
Through 2030, ASML management expects semiconductor market spending to grow by 9% a year. If ASML can slightly surpass this spending and generate 12% annual revenue growth for the next five years, revenue will hit $50 billion. ASML’s net income is around 25%, which would equate to around $12.5 billion in net income. It would require a 50% net income margin for ASML to hit $25 billion in net income, which is highly unlikely.
Long story short: No, it is unlikely that ASML will hit a trillion-dollar market cap by 2030.
ASML PE Ratio data by YCharts.
What matters more than $1 trillion
ASML may not hit a trillion-dollar market cap in 2030, but that doesn’t necessarily make it a bad stock to own. Investors should ask two questions: Is this a good business, and is it a stock that trades at a reasonable price?
The company currently has a monopoly on advanced lithography equipment. I think that makes it a good business. Not even China’s state capacity investment has been able to replicate the technology. The stock doesn’t look ridiculously expensive, either. It currently has a P/E of 37 after falling 35% this year, which is almost exactly its long-term average.
If ASML can keep growing its revenue along with the overall semiconductor market, the stock will generate adequate returns over the next five years. Just don’t expect it to immediately reach a market cap of $1 trillion.
Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.