Warren Buffett taught us not to try to time the market when looking for stocks to buy. However, it’s important that I value companies carefully before investing in them.
Part of this requires a close look at any business’s future earnings growth potential. One company I’m keen on at the moment, ASML (NASDAQ:ASML), has positioned itself well for what I think will be explosive returns next year.
Flat 2024, dynamic 2025?
After the chipmaker showed a minor contraction over the past 12 months, its outlook for next year is much more favourable. Management is targeting revenue of between €30bn and €40bn for 2025, indicating potential growth of 45% from previous levels.
A lot of this massive increase in demand is going to be related to AI. The firm’s monopoly in producing smaller, more powerful chips is also supporting this growth. Its proficiency in extreme ultraviolet lithography, a process used to print intricate patterns on semiconductor materials, is fundamental to this.
ASML forecasts that the semiconductor market is going to grow at an annual rate of approximately 9% from 2020 to 2030. Therefore, the company’s potential short-term gains aren’t all I’m bullish about. I think this investment is a worthy long-term holding to consider.
Expensive, but worth it
The market has valued the business highly. However, I believe the risks here are low. The high future growth analysts and management have forecast means a rich valuation is likely to be sustained for now.
At the moment, the shares trade at a forward price-to-earnings ratio of over 24. That’s high if I compare it to the industry median of nearly 19. That being said, a company with exceptional three-year annual earnings per share growth of 33% is always going to be more expensive than companies performing more moderately.
The current average 12-month analyst price target on ASML indicates a 38.5% price increase. That’s an extremely good reason to invest, and it’s a foundational reason why I’ll be buying these shares as soon as I can.
What could go wrong?
No investment is risk-free. One of the major concerns I have with this opportunity is that after a boost to revenue growth in 2025, I think market sentiment could wane. That’s because the company and analysts are expecting much more moderate results in 2026.
That contraction in rates of expansion affects the valuation multiples of a company, including the price-to-earnings ratio and the price-to-sales ratio. Therefore, I do expect some volatility in the share price around the end of 2025.
In terms of broader long-term risks, I also believe there could be an issue geopolitically. Already, the US government has restricted ASML from selling its advanced lithography machines to China.
Any escalations in Taiwan, which is where ASML’s key customer, Taiwan Semiconductor Manufacturing Company, is based, could further complicate matters. This could cause a significant potential impact on ASML’s medium-term revenues.
This is a world-class buy for me
There are very few investments that I consider perfectly positioned for massive future gains. However, I think this is one of them.
Despite any issues ahead, I’m comfortable with the risk-to-reward profile here. I’ll be buying ASML shares as soon as possible.
