Summary

• ASML faces risks from market cooldowns and tightening export rules to China but remains optimistic with a revenue target of €44-€60 billion.

• Opportunities lie in AI, High NA deliveries, and potential geopolitical shifts, with Europe likely prioritizing local chip production to reduce reliance on China.

• ASML's EBITDA is projected to grow at 13.7% through 2026, with free cash flow expected to grow at 45.8%, driving strong shareholder returns.

• Despite being 6% overvalued against the industry, ASML's monopoly on EUV and High NA technology justifies a strong buy rating with a $1,060 price target.

• I am Dhierin Bechai. Using my Aerospace Engineering expertise, I provide a data-driven approach to investing ideas in the growing aerospace, defense and airline industry. I run the investing group The Aerospace Forum.

ASML Holding is one of the companies outside of my core analysis field of aerospace and defense that I have covered in the past. Covering ASML might seem odd for someone specializing in aerospace and defense, but there are notable similarities between both fields, such as high barriers to entry, complex products, complex supply chains, and a high degree of innovation. Furthermore, defense equipment is becoming increasingly reliant on advanced chips and there is a strategic interest involved which makes both prone to government regulations and trade rules.

I first covered ASML for the first time in 2015 with a buy rating after analysts of Deutsche Bank questioned ASML's EUV technology. Since then, EUV has gained commercial acceptance and the stock has increased 570% compared to a 190% increase for the S&P 500 and that is including the share price pressure due to increased regulations on exports to China. Since my last report in 2020, ASML stock has performed in line with the market with a 68.5% return. In this report, I will be discussing the risks and opportunities for ASML and determine whether the stock is a buy amidst tightening regulations for export to China.

Risks For ASML Include Market Cooldowns And Tightening Of Export Rules To China

This image shows the end market growth for the semiconductor end markets.

The main risk for ASML is a cooling market or softer growth in parts of the end markets, and that is also what we see in the latest market guidance. Servers, Datacenters & Storage will grow to a $361 billion end market, which is up significantly from the forecast provided during the 2022 capital market day. However, in all other end markets, the forecast for 2030 has come down.

The second element that poses a risk for ASML is the tightening export rules for exports to China. While the company sticks with its guidance for 2024, it remains a watch item. A partial offset to the risk is that sales in China are expected to account for 20% of sales next year, compared to 50% this year.

Other risks include the fact that ASML's EUV equipment is adopted by just a handful of chipmakers. However, given that this is a high-barrier business, I do not consider that a huge risk. ASML always has to make sure it is one step ahead of the market, which means that while it will not have high levels of CapEx and R&D throughout, it always will have capital expenditures and research and development costs to make sure it remains a step ahead of the competition. This year Intel was in the process of receiving its second High NA EUV tool and that in some way shows the opportunities for High NA, but in Intel's case it also shows a risk for ASML. Intel has been plagued, and the company is expected to reduce CapEx, which could affect ASML.

Opportunities Ahead For ASML On AI And Technological Advancement

This image shows the outlook for ASML.

It is important to note that while several markets have weakened in demand outlook with a total reduction in total semiconductor demand, the sales guidance has remained unchanged with a revenue target between €44 billion and €60 billion. The company also sees opportunities to grow its margins to 56 to 60 percent from 52% expected in 2025. This is driven by a 4-point expansion on EUV margins and 1 point each for Non-EUV and installed base management.

While the market outlook has come down a bit and there is pressure on sales to China, ASML remains upbeat about the future, and perhaps there also is good reason for that. I believe the reality is that while sales to China are set to decline, there needs to be an offset elsewhere if those Chinese-manufactured chips are meant for export. So, essentially, the demand does not change, what changes is which company is going to be buying equipment from ASML to manufacture the chips. Furthermore, a change in the White House could also change the stance against China. Although that is unlikely as Biden merely continued Trump's stance on China and while Trump has invited the Chinese President to his inauguration, that does not necessarily reduce the threat of new tariffs and continued elevated tension between the superpowers. So, there is an opportunity for reduced tension, but I deem it unlikely at this point in time.

At the same time, I do believe that Europe will make it a higher priority to strengthen its chip production on the European mainland to become less reliant on China and eventually become less reliant on US chipmakers.

Other opportunities for ASML include acceleration in High NA deliveries which would sub-2nm resolutions and new demand drivers. ASML, for instance, has pointed at AI opportunities years ago, but it wasn't until 2022 that this also really took off. We are in the early stages of AI rollout and that itself has significant growth ahead, and I also believe that, in the same way, ASML has benefited from themes such as AI but also indirectly from crypto mining there could be applications that might sound futuristic at this point but could materialize. Examples are quantum computing, rollout of the 6G expansion of the application of Internet of Things and autonomous vehicles. Some of these fields are already in the early stages of development and rollout, but most really have yet to become standardized in applications and society.

ASML Stock Is A Strong Buy

To determine multi-year price targets, The Aerospace Forum has developed a stock screener that uses a combination of analyst consensus on EBITDA, cash flows, and the most recent balance sheet data. Each quarter, we revisit those assumptions and update the stock price targets accordingly. In a separate blog, I have detailed our analysis methodology.

This image shows the stock price target for ASML.

I believe that ASML has strong prospects, EBITDA is set to grow at a rate of 13.7% through 2026 with free cash flow even expected to grow at a rate of 45.8%. That enables the company to significantly drive shareholder returns. In my model, I have assumed the remaining dividend payments plus future payments in 2025 and 2026 to be $6.9 billion and $4 billion in share repurchases. Even in that scenario, the cash pile would grow to $14.8 billion, up from $8.2 billion expected by the end of this year. So, there could be additional space for additional shareholder returns.

Against the industry, ASML stock is 6% overvalued. However, I do believe it is fair to use the company median for valuation purposes. The reason is that ASML has a monopoly on EUV, and it is already ahead with its High NA technology. Currently, the stock is trading slightly ahead of its 2024 valuation, but there is a 20% upside with 2025 earnings in mind and even 47% with 2026 earnings in mind. As a result, I rate the stock a strong buy with a $1,060 price target.

Conclusion: ASML Faces A Challenging Geopolitical Backdrop With High Growth Opportunities

I do believe that while ASML is certainly facing a dynamic landscape with a negative impact on the company's prospects, the growth opportunities are also significant as chip demand is continuing to grow and if Chinese chipmakers cannot meet global demand that demand needs to be filled by manufacturers outside of China which should benefit ASML as it will need to support higher production capacity outside of China.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.