Quite a few stocks have benefited from the artificial intelligence (AI) boom, but ASML (NASDAQ: ASML) has been left behind recently. Shares of the leading maker of lithography equipment to manufacture semiconductors are now trading below their pandemic-era peak as a slower-than-expected rebound and a guidance cut recently sank the shares.
However, the long-term picture for the stock still looks promising as the company has a formidable competitive advantage; it’s the only maker of extreme ultraviolet lithography (EUV) machines, which are required to manufacture the most advanced chips.
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In the AI era, demand for these machines is likely to rise. Since they are very expensive, purchasing patterns tend to be cyclical and lumpy, explaining the company’s recent setback.
While AI has gotten the bulk of the attention in the semiconductor industry, it’s still a minority of chip production. Nonetheless, ASML expects AI to be a key driver of growth over the next years, as its customers, which include the leading foundries, will need to have state-of-the-art machines to make the most advanced chips.
At its recent Investor Day conference, the company said it expects to reach annual revenue of 44 billion euros to 60 billion euros by 2030, with a gross margin of 56%-60%. That’s a broad range, but at the midpoint, it implies an 11% compound annual growth rate. In addition, that gross margin is a significant improvement from the current 51%, meaning gross profit is set to more than double or increase at a compound annual rate of 13%.
If the company is able to reach the high end of that guidance, the stock should soar over the next five years. Even at the midpoint, its bottom-line margins should expand as the business scales up.
Currently, the shares trade at a forward P/E of 30, which looks like a great price for a stock with a wide economic moat and a clear growth path to capitalize on the AI boom. Therefore, ASML’s recent setback offers a great buying opportunity for investors.
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