A shortage of AI chips could boost demand for this company’s chipmaking equipment.
The semiconductor industry took a hit in 2023 due to declining sales of personal computers (PCs) and smartphones, resulting in a 12% drop in revenue. This decline in sales also affected the demand for semiconductor manufacturing equipment as foundries and chipmakers reduced orders for new equipment and focused on reducing inventory levels. According to industry association SEMI, spending on semiconductor fabrication equipment fell approximately 15% in 2023. As a result, semiconductor equipment giant ASML issued a less optimistic forecast for 2024 as order inflows slowed down.
Despite this gloomy outlook, there are signs of improvement in the new year that could contribute to stronger-than-expected growth for ASML. The semiconductor industry is expected to witness a revenue increase of at least 20% in 2024, according to market research firm IDC. SEMI also predicts a 15% increase in semiconductor equipment spending this year, driven by the anticipated return in demand for key markets like PCs and smartphones. Additionally, the semiconductor industry is experiencing a significant demand surge from artificial intelligence (AI), particularly in the field of AI servers.
This surge in demand for AI chips might lead to a chip shortage, as the lead times for chips were already high in 2023 despite slowing demand. Contract electronics manufacturer Jabil reported estimated lead times of 35 weeks for chips used in non-automotive applications, higher than pre-pandemic levels. Lead times for automotive and high-end chips ranged from 52 to 78 weeks.
Nvidia’s flagship AI graphics card, the H100, reportedly has a waiting period ranging from 36 to 52 weeks. Chipmakers and foundries are actively working towards ramping up their production capacities to meet the demand for advanced chips like the H100. Furthermore, Nvidia is planning to transition to an even more advanced 3-nanometer (nm) manufacturing node for its next-generation graphics cards. The demand for advanced chips based on 3nm and 5nm nodes is expected to grow steadily in the long term. Taiwan Semiconductor Manufacturing (TSMC) estimates that its 3nm process could generate $1.5 trillion in revenue over the next five years.
As foundries need to invest more in manufacturing equipment to meet the growing demand for advanced chips, ASML’s role becomes crucial. ASML is the sole supplier of extreme ultraviolet lithography (EUV) machines, which enable foundries to manufacture chips using advanced process nodes. Each EUV machine can cost up to $300 million. ASML has already started shipping these machines, with Intel becoming the first customer to receive the latest EUV lithography system. Other major chipmakers like TSMC, Samsung, Micron Technology, and SK Hynix have also placed orders for these EUV-chip manufacturing units. The EUV lithography market is expected to achieve annual growth of 28% through 2029, contributing to ASML’s projected long-term growth.
Analysts estimate ASML’s annual revenue for 2023 to reach $30 billion, marking a 27% increase compared to the previous year. Earnings are also expected to rise by 36% to $21.54 per share. Although ASML management has provided cautious guidance for flat revenue growth in 2024, analysts anticipate significant improvement in both the top and bottom lines in 2025.
Investors are advised to consider purchasing ASML stock given the current opportunity. Trading at 35 times trailing earnings, ASML is priced at a discount compared to its five-year average price-to-earnings ratio of 42. Its price-to-sales ratio of 10 aligns with the five-year average as well. Analysts predict a 24% annual increase in ASML’s bottom line over the next five years. Based on estimated earnings of $21.54 per share for 2023, ASML’s earnings could reach $63.14 per share in 2028. Assuming a discounted 30 times earnings multiple in 2028, the stock’s price could soar to nearly $1,900 per share in five years, representing a 2.5x increase from current levels.
With an impressive order backlog valued at 35 billion euros ($39 billion) as of the end of the third quarter of 2023, ASML has a promising opportunity to convert more of its backlog into revenue and achieve stronger growth in 2024. Investors should act quickly to take advantage of ASML’s relatively low trading levels before the potential stock price surge.
