ASML faces near-term issues. These issues are not sufficient to deter my bullish thesis.
I believe that ASML faces upside from macro tailwinds that aren’t factored into consensus estimates.
I see value in the stock. I think that there’s a sufficient margin of safety even in a world with rising yields.
I’m a buyer of ASML stock and think that derivative strategies could be useful in this case for achieving different goals.
Michael Vi/iStock Editorial via Getty Images Investment Thesis
ASML (NASDAQ: ASML ) is an excellent company in a very attractive industry. The company holds a monopoly over key equipment necessary in semiconductor manufacturing. I expect increased demand for ASML’s products due to technological sovereignty spending in a growingly multi-polar world. This is an opportunity as I don’t think that consensus factors these macroeconomic/political tailwinds into estimates.
There are risks to near-term results, particularly in rising real yields and supply chain issues. These risks may pose material price volatility due to the recent runup in ASML stock. I prefer to look longer term, however, and see the latter as transitory and think that the valuation provides a sufficient margin of safety to protect from the former. I’m a buyer of ASML equity.
I think that derivative strategies can be helpful in this case as the expensive volatility provides different options for different investment strategies. Some Housekeeping Notes
I just want to point out before moving further that I am not a technical person. My engineering knowledge is limited. I will not make detailed comments about semiconductor technology nor will I include any such view of mine in my investment recommendation. There are great articles analyzing the technical aspects of the semiconductor space on SA for interested readers. I will, however, provide a view based on macroeconomics, politics, and financials as this is the area where I believe I can add value to the discussion. I think that my viewpoint is important for investors as the average market participant will understand and pay attention to similar dynamics as I. Tactical View on ASML isn’t Bright
There are multiple issues to be wary of when considering an investment in ASML. The company faces several potential headwinds despite its promising long-term prospects. The near-term risk-reward picture in the stock price isn’t ideal and potential buyers must be careful. The Recent Runup is Scary for New Buyers
Of the 8 articles published on SA on ASML since September, only two are bullish. Many authors note similar reasons for being cautious. They argue that the price is overbought and that the valuation has gotten ahead of the stock. ASML’s stock price has had an amazing year indeed. As can be seen from the graph below, the price increased ~60% versus a 37% increase in the price of iShares Semiconductor ETF ( SOXX ) and a 26% increase in the S&P 500 index. The authors are correct in that these kinds of rapid prices increases tend to increase fragility and volatility. The stock price was supported by an expanding multiple but contrary to popular belief, the multiple expansion wasn’t the main reason for the positive price action. I’ve provided YTD charts of ASML’s stock price versus its EV/EBITDA, EV/Revenue, and P/E multiples below which show the stock price’s better relative performance versus the multiple. EV/EBITDA expanded from 38.2x at the beginning of the year to 42.8x today, EV/Revenue from 11.9x to 16.2x, and P/E from 50x to 53.5x. The multiples increased 12%, 36%, and 7% respectively. Most of the price appreciation came from financial performance. Source: CapitalIQ
It’s worth noting that this price and multiple expansion came at a time of falling broad multiples. S&P 500 index’s P/E multiple fell 18% YTD for example, while ASML’s stock saw these gains. The stock has seen a lot of relative inflows and may indeed be technically overbought as the authors have commented. ASML Faces Near-Term Supply Chain Risks
The company isn’t isolated from supply chain issues. ASML has struggled with both logistics and sourcing in its recent quarter. The global situation seems to be improving with freight rates easing and production ramping up to capacity but if the situation deteriorates for whatever reason, ASML stock may suffer. The management doesn’t see further risks and hasn’t factored further delays into guidance. The non-guided problem could yield a poor market reaction given the recent runup in the stock price if it materializes. This happened last quarter. The earnings results of the next quarter or two are also vulnerable to […]