Profit ratio

ASML Holding Stock: Valuation looks attractive now

I am neutral on ASML Holding (ASML) as its significantly undervalued stock price based on historical valuation multiples and analyst consensus price targets is offset by the many headwinds and challenges the company is trying to navigate at the moment.

ASML is a leading semiconductor company based in the Netherlands. It specializes in photolithography systems, making it a key player in the rapid evolution of semiconductor chip technology capabilities. As a result, ASML’s customer list includes all major semiconductor manufacturers.

In this article, I will outline three reasons why I am bullish on ASML stock at current prices.

Weak first quarter results

ASML recently released impressive first quarter results, which showed revenue at the top of the company’s guidance at 3.5 billion euros. First quarter net bookings were also impressive at €7 billion, including €2.5 billion in EUV systems.

The company also continued to advance its technological competitive advantage during the quarter by launching its first eScan460 system. It is a next-generation single-beam inspection system that has higher resolution and 50% faster throughput than the previous system.

Finally, ASML announced that it plans to repurchase up to €9 billion of the company’s shares by the end of 2023. ASML made substantial progress on this plan in the first quarter by repurchasing for 2, 1 billion euros of shares. The company has also been increasing its dividend at a rapid pace as it doubled the dividend in 2021 and will likely continue to grow it rapidly in the years to come.

Strong competitive positioning

ASML’s competitive positioning is hard to beat in its industry as its strong relationships with major semiconductor manufacturers and substantial technical prowess give it strong profitability.

On top of that, it enjoys huge economies of scale, allowing it to invest aggressively in research and development to further improve its technical prowess without hurting profit margins too much. Its scale also allows it to hire the best and brightest in the industry to give it an extra edge over its competitors.

Attractive stock price

In addition to its very strong fundamentals and formidable competitive advantages, ASML’s stock price looks quite attractive after its recent sell-off. For example, its forward price-to-earnings ratio is currently 25.6x, which is a significant discount to the company’s five-year average forward price-to-earnings ratio of 32.3x.

Additionally, its forecast enterprise value to EBITDA ratio is only 20.1x compared to its five-year average of 25x.

The Taking of Wall Street

Wall Street analysts seem to be somewhat bullish on the stock. According to Wall Street analysts, ASML has a moderate buy consensus rating based on three buy ratings, one hold rating and one sell rating over the past three months. Additionally, the average ASML price target of $686.67 puts the upside potential at 28.7%.

On top of that, earnings per share are expected to continue to grow at an impressive rate for the foreseeable future, with an expected CAGR of 17% through 2026. The company’s free cash flow is expected to grow at a CAGR of 21. 6% over this period, while EBITDA should increase by 13.3%.

The dividend per share will likely continue to grow, albeit at a slower pace, at a CAGR of 5.2%. This is reasonable given that management favors buyouts over dividends and wants to retain plenty of cash flow to continue building its technology leadership in the sector.

Summary and conclusions

The ASML share benefits from very strong growth momentum and robust profitability. On top of that, it has a clear advantage when it comes to technological prowess and research and development capabilities.

With its enormous economies of scale relative to its competitors, ASML should be able to maintain, if not extend, its technological edge and overall industry leadership for years to come while simultaneously increasing its dividend at a pace supported and buying back shares aggressively.

Meanwhile, the stock price looks quite attractive relative to historical valuation multiples, and Wall Street analysts are generally bullish on that as well. In fact, the consensus price target implies substantial upside potential over the next year.

Another factor to consider is that the global economy is experiencing technological advancements at an exponential rate. With the emphasis on artificial intelligence and data analytics in today’s business and government sectors, as well as increasing military competition between major powers like China and the United States, major players semiconductor industry technologies are poised to reap rich rewards.

While no investment is without risk and the current challenges plaguing the global supply chain and the possibility of a plunge into a global recession could certainly hurt ASML’s performance, the margin of safety appears wide enough and the fundamentals of the company and the competitive advantages seem compelling enough here that investors might consider adding stocks.

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