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. 

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%. 

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. 

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.

Looking beyond the popular consumer-focused companies, I set out to identify three listed technology stocks that manage to combine a mature business model and strong competitive market position.

Broadcom (NASDAQ: AVGO) produces many of the “nuts and bolt” components that power our technology devices.

Its share price currently sits some 15% below recent highs and the company has provided investors with stellar returns over the past five years.

This is no “newbie” company, though. Its heritage goes back to 1999, when Hewlett Packard chose to spin off its semi-conductor division as Agilent Technologies.

After more than 20 years of acquisitions and growth, Broadcom now generates annual revenues of around $27.5bn and has consistently increased both profits and margins in recent years. It is also pays out a regular dividend, which (at a yield of 2.8%) is not to be sniffed at in this sector.

Possible headwinds include continued supply chain issues and accusations of anti-competitive behaviour both in the EU and US.

However, I think that the market will shrug off these issues and, with estimated earnings of around $33 per share this year — at a price-to-earnings (P/E) ratio of 17.5 — Broadcom looks an attractive buy to me.

Another major player in the worldwide semi-conductor market, Dutch company ASML Holding (NASDAQ: ASML) was similarly affected by recent global supply chain issues, as well as a damaging fire to its Berlin manufacturing plant at the turn of the year.

These issues are likely to have a knock-on effect to the output of certain chip products that it supplies around the world – most notably where it holds a virtual monopoly in certain niche product areas.

The company has, however, put in place a plan to hire an additional 35,000 workers in 2022 in order to reverse its sales decline and to meet demand, which is running at up to 50% above current capacity.

These operational issues have led the market to hit the share price hard, and ASML now trades at around 25% below its 52-week high.

It will take some time for this company to restructure itself for the future, but I take comfort from the fact that it has good products that are in demand. On this basis, I am confident that ASML is a good bet for the long term and I will be adding some shares to my portfolio at $662.

The last of my three picks is chip maker Qualcomm (NASDAQ: QCOM). This is a company that has powered the evolution of mobile devices and smart phones for many years now.

Over the last three years, Qualcomm has demonstrated impressive profits growth, while at the same time reducing its heavy debt burden. Interest rate rises will be a worry for the future but, at $166 per share, Qualcomm is trading well below most analysts’ expectations.

With a forecast P/E ratio of just over 14 times, I believe that this stock offers good value and has more to give.

Here, I’m going to highlight some key trades they’ve been making recently. Should I buy these stocks for my own portfolio?

Blue Whale

Let’s start with boutique investment management firm Blue Whale. It runs the Blue Whale Growth fund, which has delivered excellent returns for investors since its launch a little over four years ago.

Here, portfolio manager Stephen Yiu has been adding to his position in semiconductor manufacturing equipment maker ASML (NASDAQ: ASML). Yiu believes ASML, which sells its equipment to the likes of Taiwan Semiconductor Manufacturing Company, Samsung, and Intel, is “well-positioned to benefit disproportionately from the almost 25% expected yearly growth in demand for smart and connected devices going into the next decade.”

Would I buy ASML for my own portfolio? Yes. I actually bought some stock last month when it was trading near $740. My view is that with governments looking to build semiconductor manufacturing plants domestically, ASML is well-placed for growth.

It’s worth noting that its shares aren’t cheap. Currently, the forward-looking P/E ratio is about 55. This adds risk. However, I’m comfortable with the valuation as ASML basically has a monopoly position in its market.

Baillie Gifford

Next up, Baillie Gifford. It runs the very popular Scottish Mortgage Investment Trust as well as a number of other top-performing growth funds.

Looking at the investment manager’s latest 13F filing, it’s interesting to see it has recently been buying shares in fitness equipment company Peloton (NASDAQ: PTON). In the third quarter of 2021, the firm snapped up 7.9m PTON shares, increasing the size of its holding by nearly 40%. 

This is a stock I’m happy to avoid for now as the company is struggling a bit. This is illustrated by the fact that it generated a huge loss in the most recent quarter and also cut its revenue guidance for the last quarter of 2021 by $1bn.

It’s also worth pointing out that Peloton’s management is still confident about the long-term growth story. I think there are better stocks to buy right now however.

Fundsmith

Finally, we have Fundsmith, which runs the UK’s most popular fund, Fundsmith Equity. Its latest factsheet reveals that, in October, the fund completed the purchase of a position in Amazon (NASDAQ:AMZN). This is a stock fund manager Terry Smith has had his eye on for a while. It seems he finally sees the valuation as attractive.

Would I buy Amazon shares for my portfolio today? Yes. The stock has lagged the market this year and I think the share price weakness has provided a good buying opportunity. Of course, the stock isn’t cheap at 70 times next year’s expected earnings. However, I’m comfortable with that multiple given Amazon’s dominance.

I’ll point out that Amazon does have a few challenges to work through in the near term. Supply chain issues and wage inflation are two issues the company is dealing with right now. These could impact near-term growth.

I don’t expect these issues to last forever though. Eventually, they should dissipate and when they do, I think Amazon’s share price is likely to move higher.

In October, I took advantage of some of this share price weakness and bought two US tech stocks for my Stocks and Shares ISA. Here’s a look at the two companies I invested in.

Powering the digital revolution 

The first tech stock I bought for my ISA in October was ASML (NASDAQ: ASML). It’s one of the world’s top manufacturers of semiconductor-making equipment and a leader in the lithography space (lithography is the process of printing patterns of electronic circuits onto silicon). I initiated a position here around the $740 mark.

There are a few reasons I’m bullish on ASML. The first is that governments around the world are looking to boost domestic semiconductor production in order to ease supply chain challenges. In the US, for example, the government is going to support Taiwan Semiconductor Manufacturing Company in building a $12bn manufacturing plant. I think this trend should benefit ASML because these new plants are going to require a ton of manufacturing equipment.

The second reason I’m bullish on ASML is that demand for semiconductors – which power almost all modern electronic devices including smartphones, laptops, and electric vehicles – is likely to rise significantly in the years ahead as the world becomes more digital. Already, demand is sky-high today. However, as new technologies such as 5G, autonomous vehicles, and artificial intelligence are rolled out, demand for chips is likely to increase further.

There are risks here, of course. One is the stock’s valuation. When I bought shares, the stock was trading on a forward-looking P/E ratio of about 47. That doesn’t leave a huge margin of safety.

However, I’m comfortable with the higher valuation. ASML basically enjoys a monopoly position in the lithography equipment market (around 85% of global revenues) so I think it’s worth a premium to the market.

400m users worldwide 

The other US tech stock I bought for my Stocks and Shares ISA last month was PayPal (NASDAQ: PYPL). Its share price pulled back after it came to light that the company was looking at buying Pinterest (it has since declared that it’s not pursuing this deal). I bought some shares at around the $242 level.

The reason I bought PayPal is that I expect it to benefit from the growth of e-commerce over the next decade. When online retailers offer PayPal as a checkout option, consumers are nearly three times as likely to complete their purchases. So retailers really can’t afford to ignore the company.

It’s worth noting that according to Juniper Research, digital wallet spending could exceed $10trn globally by 2025, up from $5.5trn in 2020. I think PayPal, with its user base of over 400m customers, is likely to benefit from this growth.

Like ASML, this stock has a higher valuation. When I picked up the shares, the forward-looking P/E ratio was around 50. This valuation carries risk. If future growth is disappointing, the stock could underperform.

Overall however, I think the long-term risk/reward proposition here is attractive. I’m optimistic that the company can continue to generate solid growth in the years ahead.