There aren’t too many top-tier growth stocks trading at attractive valuations right now. Yet ASML (NASDAQ:ASML) appears to be an outlier after losing 27% of its value since last summer.
Here’s why I think this world-class tech firm deserves a place on investors’ radars.
A near-monopoly
ASML makes semiconductor equipment, namely the lithography scanners that print the tiny circuits on computer chips. What makes it unique is that it’s the sole supplier of EUV (extreme ultraviolet) machines used for the most advanced chips (ones used in AI systems, iPhones, etc.).
While it has a 100% monopoly on this market, companies like Nikon and Canon remain competitors for older lithography technologies (known as DUV). But ASML’s new High NA EUV machine pushes innovation to the extreme, enabling sub-2nm nodes. In other words, ultra-tiny chip designs.
ASML makes money both selling these machines – the new ones cost $350m-$400m each – and then maintaining the installed base worldwide. Given this extreme cost, its customer base largely consists of leading chip foundries like Taiwan Semiconductor Manufacturing Company (TSMC), Samsung, and Intel.
Revenue has jumped from €11.8bn in 2019 to €28.3bn last year, with net profit rising from €2.6bn to €7.6bn over this time. Management sees revenue rising another 15% or so this year.
Near-term challenges
There are a few reasons for the stock’s weakness since last summer. One relates to tariff uncertainty. ASML has one of the world’s most complex supply chains, and we just don’t know what’s going on with tariffs from one week to the next.
Also, given the fundamental importance of EUV technology to the global chip industry, ASML has found itself in the middle of the trade war between the US and China. It’s having to seek new export licences, with strict limits on what it can sell to Chinese customers.
Consequently, ASML is unable to say whether there will be any growth in 2026. In Q2, it booked €5.5bn of orders against €7.7bn of sales.
Adding to the uncertainty is Intel, which has been struggling for some time now. It might be a stretch to expect Intel to start hoovering up loads of High NA EUV machines.
Attractive valuation
These types of challenges were why I sold ASML stock last year. It was looking a bit pricey given the challenges and uncertainty.
Fast-forward to now, though, and I think the valuation looks too cheap to ignore. The price-to-earnings (P/E) ratio is 28, which is a significant discount to the five-year average (nearer 40).
On a forward-looking basis, the P/E multiple is 26, falling to just 22 by 2027. All other valuation metrics are discounted compared to previous years.
Given this, I suspect much of the fear and risk is priced in here. The fact remains that ASML still dominates the lithography industry, without which there would be no AI revolution at all.
Meanwhile, the firm now rakes in around €8bn in annual revenue from servicing its installed base of systems. This aftermarket revenue is both recurring and high-margin.
Over the long term, demand for chips will rise, and both Taiwan Semiconductor Manufacturing and Samsung will eventually transition to High-NA EUV to continue shrinking transistor features.
I reckon ASML stock looks like a bargain hiding in plain sight. And this makes it worth considering for investors with a multiyear horizon.
