The ASML (NASDAQ:ASML) share price has soared by 50% over the past six months. And since April 2018, it has risen by over 230%.
The stock is a favourite with private investors. During the first two weeks of April, it was the most bought by DEGIRO‘s European customers.
It’s also the second-biggest shareholding in the Scottish Mortgage Investment Trust portfolio.
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But I wonder whether I’ve left it too late to join the party?
Cash in your chips
ASML designs and manufactures the lithography machines that are necessary to produce semiconductors.
The company claims that 175 zettabytes of data will be created annually by 2025. This is the equivalent of 1trn USB sticks, each holding one gigabyte of data.
To process this enormous volume, more computer chips will be needed. And ASML is confident it’ll benefit from this rising demand.
Today the company released its earnings for the first quarter of 2023. Compared to the previous three months, net sales increased by 4.9% to €6.75bn. And net income improved by 7.6% to €1.96bn.
But the company reported “mixed signals on demand“.
And major players in the semiconductor industry, Samsung, SK Hynix, and Micro, are all scaling-back production.
The Dutch government is also placing export restrictions on some of ASML’s sales to China.
But I adopt a long-term approach when looking at potential stocks to buy.
ASML is forecasting revenue of €30bn-€40bn in 2025, and a gross margin of 54%-56%. By 2030, the company is predicting sales of up to €60bn with an improved margin of 60%.
Taking the mid-point of these forecasts, and assuming a modest increase in overheads, it’s possible that earnings per share could more than double by the next decade.
| Metric | 2021 (actual) | 2022 (actual) | 2025 (estimate) | 2030 (estimate) |
| Net sales (€m) | 18,611 | 21,173 | 35,000 | 52,000 |
| Gross profit (€m) | 9,809 | 10,700 | 19,250 | 30,160 |
| Gross profit margin (%) | 52.7 | 50.5 | 55.0 | 58.0 |
| Other costs and income – net (€m) | (3,926) | (5,076) | (7,000) | (10,000) |
| Net income (€m) | 5,883 | 5,624 | 12,250 | 20,160 |
| Earnings per share (€) | 14.36 | 14.14 | 19.17 | 32.06 |
If this analysis is correct, I don’t believe I’ve left it too late to invest. Since 2015, sales and earnings have grown more than three times. I see no reason why this couldn’t be repeated over the next seven years.
Good value?
But the company’s stock price isn’t as cheap as chips.
It currently trades at a price-to-earnings (P/E) ratio of nearly 42. Although high, it’s not unusual for the stock of a rapidly growing technology company to have such a large earnings multiple. For example, Tesla‘s is over 50.
But a high P/E ratio could imply that much of ASML’s anticipated growth in earnings has already been factored into its stock price. I don’t think so because the P/E ratio is lower than it has been for most of the past four years. In September last year, it was over 64.
What do I think?
I mentioned earlier that the stock was the most popular on DEGIRO’s European trading platform. It’s also the most sold during the first two weeks of the month. Either investors are trading (rather than investing) in the stock, or it’s dividing opinion.
But, if funds permitted, I’d be happy to have the stock in my portfolio. It’s possible that the demand for semiconductors (and the associated manufacturing equipment) will ease over the next year or so. But with increased automation taking place in every aspect of our lives, the long-term outlook for the chip industry is positive.
