Not every artificial intelligence (AI) stock is going to the moon. Advanced semiconductor equipment maker ASML (NASDAQ: ASML) has seen its stock fall 35% this year on weak customer orders despite the booming demand for AI chips that is sweeping across the semiconductor sector. The company is struggling in every part of the market outside of AI and because of large customers such as Intel delaying orders.
The stock is now at its cheapest price in multiple quarters. At more than $700 a share, it is also a prime stock-split candidate at current levels. Investors focused on the long term may be smart to see the forest through the trees and buy the leading semiconductor equipment maker ASML at these prices. Let’s see if the stock is undervalued after this recent drawdown.
Low order levels
The headline figures made ASML’s latest quarterly result look rock solid. The Dutch company’s revenue hit 7.47 billion euros ($8.06 billion), up from 6.67 billion ($7.2 billion) a year ago. Gross margins were consistent, and the company generated close to $2.7 billion in operating income.
So why did the stock fall? One reason: customer orders. ASML has benefited greatly from the increased demand for advanced semiconductors. Their manufacturers use its lithography machines to make chips that are used in smartphones, cloud computing, and now AI. That last category has created a near-insatiable demand for computing power that is supposed to lead to increased orders for ASML machines.
That may have materialized, as ASML got $1.5 billion in AI-related extreme ultraviolet lithography (EUV) machine orders last quarter. However, the rest of the business was slow, meaning the company generated just $2.8 billion in total customer bookings in the quarter.
This was one of ASML’s weakest quarters in recent memory. If these slow orders continue, they will erode ASML’s backlog and eventually affect its revenue growth.
Benefiting from AI, up to a point
The reasons for this slowdown did not come from the key semiconductor supplier to the AI market, Taiwan Semiconductor Manufacturing. One of ASML’s most important customers, TSMC (as the company is known for short) is seeing record revenue growth and keeps pouring money into new factories, which means more orders for ASML machines.
ASML’s stock problems stem from the investing community focusing too much on AI and not on the other parts of the market. Intel is currently going through a rough patch and is one of the largest buyers of the company’s machines.
The Chinese region is a large market for ASML and can be opaque at times for Western investors. Some analysts are theorizing that slowing China demand — especially with the uncertainty around sanctions from the U.S. government — is why orders are drying up.
Whatever the case, ASML did have weak orders this quarter, way worse than expected. This is why the stock has fallen so much this year.
ASML PE ratio, data by YCharts; PE = price to earnings.
Is the stock a no-brainer?
Even with the stock down in the dumps, ASML does not seem cheap. It has a trailing price-to-earnings ratio (P/E) of 37, and a forward P/E of around 34.5 based on Wall Street estimates. These are high earnings ratios that indicate investors are still optimistic about the company’s future.
I think they should be. According to management, semiconductor market spending is expected to grow at around 9% per year through 2030. For the most advanced semiconductors, which ASML can help create, that number may be even higher. This increased spending should translate to more orders for its machines, even if those orders are lumpy.
Despite the slow recent quarter, ASML’s prospects over the next decade look promising. Investors should be happy if they buy shares today and hold them for the next decade or longer.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.