Can ASML Holding NV Maintain its Dominant Position?

After rallying to a 1-1/2 year high earlier this month, shares of ASML Holding NV (ASML), Europe’s most valuable technology company, have come under pressure on signs that the slump in demand for global electronics is persisting.  Demand concerns intensified after Taiwan Semiconductor Manufacturing Co (TSM), the main chipmaker for Apple and Nvidia, cut its annual outlook and projected a 10% fall in sales, versus previous guidance for a single-digit decline.

ASML Holding NV is the world’s only maker of machines needed to produce the most advanced semiconductor chips used in everything from cars and smartphones to computers and airplanes. Some analysts remain confident that any decline in ASML’s share price will provide a buying opportunity. Jeffries said, “There is no competition for the company at all,” and sees the chip sector soon entering an upcycle, which will peak sometime in 2025 and fuel margin expansion for ASML for the next 12 to 18 months.

With the stock priced at about 29 times forward earnings, ASML Holding is more expensive than peers such as Applied Materials (AMAT) and KLA Corp (KLAC).  However, Jeffries said that valuation is “justified” considering ASML’s dominant footing in advanced chipmaking machines.  However, economic uncertainty remains high, with the global chip industry currently grappling with the impact of inflation and recession fears that triggered a pullback in consumer and business spending last year.  Also, delays in constructing chipmaking plants worldwide are affecting the demand for ASML chipmaking devices.

Concerns that the global electronics slump may persist despite a boom in artificial intelligence (AI) development are also weighing on ASML shares.  Last Friday, Societe General downgraded ASML Holding to hold from buy in anticipation of a temporary slowdown and said, “2024 may prove to be a complicated transition for ASML, before growth resumes in 2025 against a backdrop of a strong industry-wide recovery.” 

There is concern that the attempt by the U.S. to curb exports of cutting-edge technology to China, ASML’s third-biggest market, could be a drag on the company’s sales.  The U.S. government pushed the Dutch government last month to announce plans to probit ASML from shipping immersion DUV lithography machines to China.  ASML is already prohibited from selling its most sophisticated EUV technology to Chinese companies.  However, ASML said the measures wouldn’t have a material impact on its sales, saying it has a 38-billion-euro ($42 billion) order backlog and recently boosted its sales targets for 2025 and beyond.  Citigroup said, “The strong backlog of 38 billion euros supports such a growth outlook” for ASML Holding. 

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.