ASML (NASDAQ:ASML) shares have fallen like other growth stocks this year, despite the considerable demand for semiconductors and the group’s position as the leading provider of lithography machines.
So, what’s happening with ASML, and is this stock right for my portfolio?
What does ASML do?
ASML might be new to some investors. The Dutch firm manufactures the complex lithography machines that chipmakers use to make semiconductors. These semiconductors are then used in electrical goods, such as iPhones and cars — notably electric vehicles that require more semiconductors than combustion-engine vehicles.
When it comes to EUV (extreme ultraviolet) lithography machines — the most advanced system — ASML is more than just the market leader. The Dutch juggernaut is the only firm in the world capable of making the highly-complex machines that are needed to manufacture the most advanced chips.Â
Guidance cuts
Despite a well publicised shortage of semiconductors, ASML cut its guidance for the year on Wednesday.
The firm said that second-quarter net profit rose, but it lowered full-year revenue growth guidance to 10%, from the previous 20%.Â
ASML highlighted that demand remains strong, but said increasing supply chain constraints have caused delays. The manufacturer said it plans to increase the number of fast shipments — a process that skips some factory testing — to meet customer demand.Â
Around €2.8bn of revenue will be deferred to 2023.
Year-on-year growth was still impressive though. Net sales for the quarter were €5.4bn versus €3.5bn a year ago. Gross margins for the quarter were 49.1%.
Valuation
ASML is a company on an impressive growth curve. It has a price-to-sales ratio of around 9.7 and has a price-to-earnings ratio of around 30, although this is dropping quarter by quarter.
I don’t think that looks too expensive considering the scale of growth. But I am slightly concerned about the company’s inability to keep up with demand this year.
Outlook
Demand for semiconductors is a little uncertain in the medium term given the potential for a global economic downturn. If people aren’t buying cars and iPhones, there will be less need for semiconductors and therefore lithography machines.
But I see ASML as a long-term investment. Semiconductor demand in the long run is likely to increase amid generally positive trends in the global economy. And as a key cog in the industry, ASML is likely to benefit.
It would also be difficult for new market entrants to reach ASML’s high standards. The firm is constantly developing its technology. ASML is gradually rolling out its next-generation EUV systems. Costing around $300m each, these machines allow chipmakers to manufacture even smaller semiconductors beyond the smallest 2nm node.
Would I buy ASML shares?
In the long run, it looks like ASML shares could gain on the back on the growth on the semiconductor industry. Just look at how much money TSMC is investing in growth — it’s clear that it thinks demand will grow exponentially.
I think the current valuation is attractive and I’d add this stock to my portfolio.