ASML Holding ASML, a global leader in semiconductor manufacturing equipment, has seen its stock price tumble 32.2% in the past six months. This dramatic decline has significantly underperformed the Zacks Computer and Technology sector and the S&P 500, which returned 6.5% and 11.2%, respectively, over the same period.

ASML stock has also underperformed its peers, including Lam Research LRCX, Applied Materials AMAT and Advanced Energy Industries AEIS. Advanced Energy Industries shares have risen 8.1%, while Lam Research and Applied Materials have plunged 24.7% and 28%, respectively.

6-Month Price Return Performance

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Investor concerns about muted guidance for 2024 and 2025 have weighed heavily on the stock. While the dip has raised questions about whether ASML Holding is a bargain or a value trap, the best strategy, for now, might be to hold the stock and wait for clearer skies.

ASML’s Short-Term Challenges Weigh on Investors’ Sentiment

ASML Holding’s third-quarter 2024 results were solid, with net sales of €7.5 billion and net income of €2.1 billion, reflecting year-over-year growth of 11.9% and 9.7%, respectively. Earnings per share also rose 9.8% to €5.28, showcasing operational efficiency.

However, ASML Holding’s muted guidance for the fourth quarter has tempered investor enthusiasm. ASML projects sales in the range of €8.8-€9.2 billion with a gross margin of 49-50%, signaling profitability challenges. Management’s forecast of weaker order intake in 2025, due to sluggish recoveries in mobile and PC markets, adds to the cautious outlook.

Analysts have revised earnings estimates downward, reflecting reduced optimism about near-term growth, further pressuring the stock.

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ASML’s High NA EUV: A Strategic Bet With Margin Pressure

ASML Holding’s High Numerical Aperture Extreme Ultraviolet (High NA EUV) systems are critical for manufacturing advanced chips powering artificial intelligence (AI) and high-performance computing. While these systems position ASML at the forefront of technological innovation, their complexity and high production costs have created short-term margin pressures.

In the third quarter, ASML shipped two High NA EUV systems, with revenues expected by year-end. However, management anticipates a 3.5% margin dilution in the fourth quarter due to the ramp-up costs associated with these systems. Scaling production will likely continue to weigh on profitability in the near term.

Geopolitical Risks and Macro Challenges for ASML

Geopolitical tensions, particularly between the United States and China, present a substantial risk. With China accounting for 47% of ASML Holding’s lithography shipments in the third quarter of 2024, escalating U.S. export restrictions could impact revenues from this critical market.

In addition, broader macroeconomic concerns, such as inflation, slowing demand in mobile and PC markets and delayed recovery in the memory segment, further cloud the near-term outlook. These challenges underscore the cyclical nature of the semiconductor industry, even as it prepares for a long-term rebound.

Premium Valuation: A Concern for ASML Stock

Despite its recent slide, ASML Holding remains expensive compared to its peers. Its forward 12-month price-to-earnings multiple of 28.17X exceeds the Zacks Semiconductor Equipment - Wafer Fabrication industry average of 27.86X. By contrast, competitors Lam Research, Applied Materials and Advanced Energy Industries trade at more modest multiples of 20.95X, 17.89X and 25.40X, respectively.

The premium valuation reflects ASML Holding’s industry leadership and technological edge but limits immediate upside potential.

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Why ASML Remains a Long-Term Winner

ASML Holding’s long-term growth story is compelling. As the global leader in EUV lithography, the company plays an indispensable role in producing advanced chips used in AI, 5G and high-performance computing. Its €36 billion order backlog highlights sustained demand for its cutting-edge equipment.

ASML Holding’s alignment with megatrends, such as AI adoption, renewable energy and digital transformation, positions it for continued growth. Ongoing global investments in semiconductor fabrication plants further bolster its outlook, as these facilities will require ASML’s lithography systems to scale production.

Efforts to enhance capacity and strengthen supply-chain partnerships demonstrate ASML Holding’s adaptability and commitment to meet rising demand in a rapidly evolving market.

Conclusion: Hold ASML Stock for Now

While ASML Holding faces short-term headwinds, including margin pressures, muted guidance and geopolitical risks, its dominant position in the semiconductor manufacturing ecosystem and alignment with transformative industry trends make the stock worth holding.

The company’s premium valuation reflects its technological leadership, but near-term challenges could cap upside potential. For investors, holding ASML Holding stock allows participation in its robust long-term growth story while navigating temporary volatility. Patience appears to be the best strategy for now, as the company remains well-positioned to capitalize on the future semiconductor boom. ASML stock carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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