The Nasdaq Composite is off to a solid start this year, with the index gaining nearly 13% so far as investors have cheered the cooling inflation and the potential arrival of a bull market in 2023.
History suggests that the Nasdaq could have a terrific year following 2022’s woeful performance. As such, it won’t be surprising to see the likes of ASML Holding (NASDAQ: ASML) soar higher on the back of improving stock market sentiment and healthy growth in the top and bottom lines. Shares of the Dutch semiconductor giant are already up 20% in 2023, and the company’s latest results indicate that its rally could be here to stay.
That’s why investors — even Warren Buffett — may want to buy ASML stock before it is too late. Buffett jumped into the semiconductor industry last year with a $4 billion stake in Taiwan-based foundry giant Taiwan Semiconductor Manufacturing, popularly known as TSMC. The stock has been in red-hot form in recent months, gaining nearly 25% in 2023 itself. ASML stock could also turn in such an impressive performance as it is a key supplier of equipment to chipmakers, including TSMC. Let’s look at the reasons why Buffett — and you — should consider buying ASML before it is too late.
ASML’s moat is powering impressive growth
Holding solid companies for the long run is one of the key reasons why Buffett’s Berkshire Hathaway outperformed the S&P 500‘s annual returns for a long time. As ASML is a provider of critical manufacturing equipment to semiconductor companies, it is operating in a market that’s set for secular long-term growth.
After all, the global semiconductor industry is expected to generate over $1 trillion in revenue by 2030 as compared to $556 billion in 2021. ASML is in a nice position to take advantage of this opportunity as it dominates the market for photolithography machines that are used for printing chips. What’s more, ASML is the only supplier of extreme ultraviolet (EUV) lithography machines that are used by chipmakers to manufacture chips based on advanced process nodes. These EUV machines produce half of the company’s sales.
All this indicates that ASML has a strong moat that should help it clock impressive revenue and earnings growth in the long run. This is evident from the company’s impressive order backlog, which stood at 40.4 billion euros at the end of 2022. That was nearly double the company’s 2022 revenue of 21.2 billion euros. It is also worth noting that ASML recorded net bookings worth 30.7 billion euros in 2022, up from 26.2 billion euros in 2021.
What’s impressive is that customers continued placing orders for ASML’s machines last year despite a stark slowdown in semiconductor demand. Gartner estimates that global semiconductor industry revenue increased by only 4% in 2022, following a 26% jump in 2021. The research firm estimates that semiconductor revenue could fall 3.6% this year, but ASML is forecasting a 25% increase in revenue to 26.5 billion euros and a small jump in the gross margin despite the weakness predicted in the broader market, suggesting that it is on track to sustain its impressive growth this year.
That’s not surprising, given the healthy backlog ASML is sitting on thanks to its competitive advantage. More importantly, the Dutch giant is expected to sustain its momentum in the long run as well. The company forecast 35 billion euros in revenue in 2025 at the midpoint of its guidance range. However, it won’t be surprising to see it hit the higher end of its forecast — which sits at 40 billion euros — as chipmakers are in a race to shrink the size of chips to make them more powerful and energy-efficient.
By 2030, ASML forecasts annual sales between 44 billion euros and 60 billion euros. The higher end of that forecast suggests that the company is aiming to almost triple its annual revenue over the next eight years. This also explains why analysts expect the company’s earnings to clock a compound annual growth rate of 30% over the next five years.
More reasons to buy the stock
ASML’s terrific long-term prospects are just one of the many reasons to buy the stock. The company also has a solid balance sheet, with its cash position of $7.4 billion exceeding its debt of $3.5 billion substantially. It also sports a dividend yield of 1.5% and a payout ratio of 45%, suggesting that its dividend is sustainable.
As such, ASML has the capability of compounding investors’ wealth in the long run, thanks to a combination of stock upside and dividend payouts. That’s why investors may want to buy the stock before it moves higher.
ASML stock currently trades at 30 times forward earnings, a discount to its five-year average forward earnings multiple of 34. So, investors can buy this tech stock at a good price right now, and Buffett may also want to do the same, considering his interest in this space and the key role ASML will play in the growth of the semiconductor industry.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML, Berkshire Hathaway, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Gartner and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, short January 2023 $200 puts on Berkshire Hathaway, and short January 2023 $265 calls on Berkshire Hathaway. The Motley Fool has a disclosure policy.