Exploring a Unique Investment Opportunity in the Chip Sector

ASML has seen a significant drop of nearly 40% from its all-time high, prompting me to begin building a position in this company.

For investors, maintaining a list of potential stocks to buy is essential, especially for those they have been eyeing but hesitated to invest in due to high valuation levels. One notable company on this list is ASML Holding. This firm has always been on my radar, and I feel that the recent price decline may finally present an opportunity to acquire shares.

Recently, ASML's stock dropped over 20% following an earnings report, putting it nearly 40% down from its peak. I consider this a buying opportunity, though some investors view it as a reason to sell. Understanding the reasons behind the selling can help determine whether now is a wise time to make a purchase.

Challenges Facing ASML's Growth

ASML is regarded as a crucial player in the chip manufacturing industry, yet it remains relatively underappreciated by the general public. The company specializes in producing lithography machines that are essential for manufacturing chips. These machines are capable of creating extremely small designs on chips, with traces as minute as 3 nanometers apart. For context, a human hair is roughly 80,000 to 100,000 nanometers wide.

ASML possesses a unique technological advantage, giving it a near monopoly in this niche market. However, it faces export restrictions. Governments in the West are concerned about these high-tech machines being sold to China and its allies, resulting in bans on the sale of ASML's most advanced machinery. While ASML can still sell some less advanced models to Chinese firms, the inability to service existing machines in China due to regulatory alignment with the U.S. has been problematic.

This situation is particularly concerning given that approximately half of ASML's sales in the third quarter came from China. However, this reliance on China is expected to normalize by 2025, according to ASML's management.

The company's financial outlook is starting to feel the effects of these restrictions. Initially, ASML projected revenue of between 30 and 40 billion euros for 2025. After the earnings report, this forecast was lowered to a range of 30 to 35 billion euros, causing concern among investors and triggering a sell-off.

I took this as an opportunity to buy shares, as I believe the situation is not as dire as some suggest.

Valuation Perspective on ASML Stock

Although the reduction in revenue guidance is disappointing, it still anticipates growth in 2025. ASML's management expects around 28 billion euros in revenue for 2024, meaning their new range for 2025 suggests growth of 7% to 25%—which is a healthy forecast for most companies. I suspect management may be setting conservative expectations now, paving the way for positive surprises in the future. It is also likely that stronger guidance for 2026 will be announced during the upcoming investor day on November 14, where management is expected to elaborate more on its outlook.

For now, I am comfortable with the current revenue projections, especially given the substantial price drop. If you are considering entering ASML stock, it is currently trading at levels similar to those immediately following the decline, and it has not yet experienced a recovery.

While ASML's shares are trading at 33 times forward earnings, making it somewhat expensive, this valuation aligns with other major tech companies that share similar growth rates. Given ASML's unique position in the market, I am encouraged that it can continue to thrive in the long term.

Investing in ASML means betting on the increasing demand for advanced chips and the need for higher quantities in the future. Given current trends, I see this as a strong investment if you are in it for the long haul, generally more than five years.

ASML, Investment, Technology