ASML: Investor Day Confirms Higher Medium-Term Expectations, Buy During Pull Backs

Summary

• ASML is one of the best companies in the semiconductor industry and has great growth prospects supported by several secular growth trends.
• In its recent Investor Day, it has revised its medium-term target upwards, as I’ve predicted in previous analysis.
• My price target is $1,000 per share by end-2024, an upside of 34% compared to its current price, thus investors should hold and then buy during potential pull backs.

Sundry Photography/iStock Editorial via Getty Images

ASML (NASDAQ:ASML) is a great company with good growth prospects, a profile that was recently confirmed at its investor day, but its upside potential is not fantastic right now and investors should buy during pull backs.

Background

Since my first article on ASML back in March, its shares are up by about 30% while during the same period the S&P 500 index increased by just 9%. This was one of my best picks over recent months and is justified by strong momentum in its earnings and increased capex from key customers, such as Taiwan Semiconductor Manufacturing Company (TSM) and Intel (INTC), which leads to strong demand for ASML’s machines over the next three to four years.

Source: Seeking Alpha.

As I’ve analyzed in a previous article, ASML is one of the companies that is very well positioned within the semiconductor industry to benefit from secular growth trends over the next decade, these trends are expected to support strong growth for its equipments and services for many years.

ASML’s previous strategic update was in 2018 and the industry landscape has changed considerably over the past three years, with strong demand coming from new technological developments, such as the rollout of 5G, artificial intelligence, autonomous vehicles, the cloud or high-performance computing that supports growth in a sustainable way for several years down the road.

These growth drivers have been stronger than ASML was expecting back in 2018, and as I’ve noted in yet another article from March, its medium-term revenue target of €15-24 billion by 2025 was clearly outdated, given that ASML’s revenues amounted to €14 billion in 2020 and growth is not expected to slow down in the coming years.

In my previous articles, I discussed that ASML could increase its target to about €30 billion by 2025, supported to a great extent by ASML’s EUV growth potential. Not surprisingly, ASML revised its revenue target upwards for 2025 in its recent investor day and now expects revenues to be between €24-30 billion in 2025.

This is more in line with my previous expectation, but I still think that ASML is being conservative in its revenue target and can beat these expectations in the coming three to four years.

Investor Day

ASML has updated the market about its business strategy and growth prospects, delivering a positive outlook for the coming years supported by several industry megatrends that are expected to fuel growth into the future.

Indeed, according to ASML, total semiconductor revenues can reach close to $1 trillion by 2030, assuming compounded annual growth rate (CAGR) in coming years similar to recent history, showing that there is a big opportunity for ASML to consistently grow its business over the medium to long term.

ASML

This should lead to increased demand across all segments, but as I’ve analyzed previously in an article about Micron Technology, these megatrends are expected to benefit mostly the logic segment compared to memory and storage, due to higher growth in industries such as automotive, industrial electronics or servers. ASML is also forecasting higher growth in the logic segment, where wafer demand is expected to reach a CAGR of close to 10% in the next five years while for memory and storage growth should be more modest.

ASML

Within the semi equipment market, lithography has better growth prospects with ASML revising future expectations upwards compared to its previous targets. For instance, it now expects EUV CAGR of close to 14% from 2017-2025, while previously was only expecting CAGR of 7.8% during the same period. This is justified by more customers using EUV, such as Intel or Micron (MU), and also from several countries pushing for investments in the industry, which is boosting demand for ASML’s machines.

ASML

Taking into account this background, it's not surprising that ASML has increased its revenue target for 2025, and now also expects higher margins compared to recent history. It expects gross margin to be between 54-56% by 2025, compared to 48-52% in the past four quarters. This is supported by a much higher weight of EUV sales in total revenues, which have above-average gross margins as ASML does not face competition in this technology.

Source: ASML.

Regarding High-NA EUV, its next technological development, ASML does not expect to generate revenues from these machines in the next three to four years, so this is more a long-term driver of further revenue and earnings growth for the company beyond 2025. According to ASML, High-NA will be needed for processes under 2nm, driving further node shrinkage to the end of this decade.

Valuation

ASML is a company with strong fundamentals and good growth prospects, but to some extent, this profile is already reflected in its valuation. Based on its earnings for the next 12 months, ASML is currently trading at some 41x forward earnings, a slightly lower valuation than in the past few months due to its recent correction in the share price (it was trading at close to 47x fwd earnings a couple of weeks ago).

Its historical valuation over the past few years is about 37x fwd earnings, thus ASML is not greatly overvalued right now, but it certainly isn’t a bargain either.

My valuation approach is to look into the next few years of revenues and earnings rather than just focus on this year or the next, to see if the stock has upside potential over a time frame of three to five years. Therefore, I’ll use 2025 estimates to see if ASML is currently undervalued or not, using its historical valuation over the past couple of years (blended forward earnings).

I think this is a conservative approach, as ASML will increase the weight of EUV sales in the total mix, where it has a monopoly, and therefore it could be argued that a higher multiple could be warranted in four or five years from now. However, I don’t want to be aggressive in my assumptions and assume that ASML will not re-rate over the coming years, compared to its recent historical valuation.

Taking this background into account, my estimate for revenues in 2025 is around €27.5 billion and net income should be around €9 billion, assuming a net profit margin of 33%, incorporating ASML’s guidance for higher profitability in the next four to five years.

This means that using a multiple of 37x fwd earnings, my price target for end-2024 is around €862 per share (vs. its current price of around €640 per share in its home listing, or price target of $1,000 per share on its NYSE listing). This represents an upside potential of more than 34% over the next three years, which is acceptable, but not particularly impressive.

Bottom Line

ASML is a great company and its growth prospects are very strong based on several secular growth trends and its monopoly position in EUV technology. Despite this, its shares had a great run in recent months and its upside potential is not fantastic right now, thus investors should hold its shares for the moment and load up the truck during periods of general market weakness.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of MU, ASML either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[Respect the Game]

Thank you for the analysis.
I have been out for a few months due to valuation but will take this opportunity to get back in. Still hoping it will drop another 20% so I can get more at a very decent price.

Hugh

[sc21]

There is no question that ASML is a strong and interesting company. However, your analysis fails to take into consideration several issues such as
l. Very high customer concentration. They are really dependent on five customers.
2.While revenue is growing, it is not growing that fast and one is paying a substantial premium for the stock. ASML sells for a pe of roughly 40 while Lam and other major semicapex firms sell for pes of under 20. Often closer to 15. At this rate we are paying a very high premium for asml. OK if you understand what you are getting but not dealt with in this piece. sc

[justaguy11]

@sc21 Lam and the other companies do not have 100% market share either.

[The Outsider]

@sc21 yes that is true and is the main issue that I see on ASML, customer concentration is indeed high. But at least for the next thee years I don't think it is an issue, Intel, TSMC, Samsung, Micron are all investing a lot of capex. It may be an issue by 2025/2025 if this build up of capacity leads to oversupply but only time will tell

[The Outsider]

@justaguy11 exactly, it is a segment of semi equipment with higher competition

[nervv]

Waiting for $550

[SuperPac]

@nervv will it get there in 2021?

[nervv]

@SuperPac It may never get there, who knows. I was just sharing my price target for potential buying.

[SuperPac]

@nervv I think with the sort of drops we are recently seeing you may get your wish. Its down from almost 900 to 725. Sizeable fall. If the broader market corrects 7% - 8%...then who knows....

[SuperPac]

Persuasive article.

ASML Holdings is one of those stocks that never appears moderately valued. Expensive, always. However, the stock has scaled up 1,000% over the last decade and 600% over the last 5 years. It has the financial performance, the moated business and the momentum. Great stock to own.

[The Outsider]

@SuperPac agree, one of the best stocks to own over the long term in the semi industry

[CyrusCynthia]

Good article. Based on your feedback about investor day, I nibbled some today.

[The Outsider]

@CyrusCynthia thanks for your comment, good entry point ASML has corrected quite a bit in recent days

[D.Rapp]

A very timely and well stated article. After the huge drop from around 890 to the 730’s I’m adding here. Could it go lower? Of course and that’s why you average into great companies like ASML.

[arsenal50]

@D.Rapp ASML has been on my watchlist for the last 6 months. I finally started nibbling on ASML shares every day this past week after the share price has dropped about 15% over the last 2weeks. I will continue to DCA with any further corrections. If it drops to $500, I’ll back up the truck!

[magenta17]

Great time to stock up on the stock! Longz ASML! :-)