ASML stock is seeing a surge after the company revealed its Q4 earnings, but the question is—has the opportunity passed, or is it still a good time to buy shares in this dominant player in the lithography space? We’ll break it down from both a fundamental and technical perspective, and I think there may still be a solid chance to invest. Despite the recent uptick in share price, the stock is still down about 20% over the last year and has been relatively flat year-to-date. We’ll also assess ASML’s valuation in historical context, which might indicate an interesting buying opportunity despite the recent rise.
Earning Overview
Starting with the Q4 earnings, they were reported in euros, but I’ll convert them into U.S. dollars shortly. One key takeaway is the Q1 guidance, which is between €7.5 billion and €8 billion, significantly higher than the consensus estimate of €7.24 billion. ASML tends to guide on the higher end of their range, so there’s potential for Q1 revenue to exceed expectations. Another important point is their bookings, which had been somewhat weak in previous quarters but saw a strong rebound in Q4, marking the highest level in the past three quarters. This indicates growing demand, which is a positive sign for future performance.
Looking ahead, ASML is expected to achieve around 37-38% growth, which Wall Street had largely anticipated, but the company’s guidance has given a little extra optimism. With strong bookings and a solid inventory, there’s potential for growth to continue into the latter half of 2025.
Fundamentals
In terms of fundamentals, ASML reported net sales of $9.3 billion for the quarter, up from $7.2 billion a year ago. This was a particularly strong quarter, although their full-year revenue showed modest growth, from $27.6 billion to $28 billion. What stands out is their massive gross margin—nearly $5 billion in gross profit on $9.3 billion in revenue. This highlights the strength of their business model.
The company’s operating margins are impressive as well, sitting around 30%. Despite a relatively small increase in R&D and SG&A expenses, ASML’s income from operations surged, reflecting efficient cost management. Net income for the quarter was $2.7 billion, while net income for the full year showed a slight decline compared to last year’s $7.8 billion.
From a balance sheet perspective, ASML has been increasing its inventory, which is a positive sign. Inventory rose from $8.9 billion last year to $10.8 billion, indicating that the company is preparing to meet future demand. This contrasts with companies like Nike, where sales are declining and inventory is building, which signals weaker demand.
Overall, ASML’s strong earnings, solid guidance, and growing bookings paint a promising picture for the company’s future growth, and the stock’s current valuation could present an interesting buying opportunity.
There are other companies to consider, and while I’m not saying you shouldn’t invest in them, from a balance sheet perspective, increasing inventories are usually a red flag when sales are declining. It suggests that a company may need to discount their products or could be stuck with unsold inventory. However, ASML is seeing rising revenue and increasing demand, so increasing inventories here is a positive sign, indicating that the company is in a growth phase.
Free Cash Flow
Another strong sign is that ASML’s cash and cash equivalents are rising—from $7 billion to $12.7 billion. You might wonder if they took on more long-term debt to boost cash, but that’s not the case here. In fact, their long-term debt actually decreased from $4.6 billion to $3.6 billion. So where’s all the extra cash coming from? The company’s operating cash flow has surged—$3.2 billion in the last quarter compared to $9 billion in the most recent quarter. This was partially driven by a change in assets and liabilities, an accounting adjustment that may make the numbers look a bit better than they actually are. Even if you adjust for that, it’s still an excellent quarter.
ASML is also not over-investing in property, plant, and equipment, spending only $704 million in the most recent quarter and about $2 billion for the full year. This shows that they can generate substantial cash flow without the heavy capital expenditure required by some other companies, like Taiwan Semiconductor. The company is also paying a modest dividend of $600 million, which is a small part of their overall cash flow.
Looking at the net positive cash flow, ASML generated $7.7 billion in the most recent quarter, with a $5.7 billion increase over the year. This all ties back to their strong financial position: increasing cash, decreasing debt, and solid operating cash flow. These factors all contribute to ASML’s ability to command a premium multiple.
Risk And Challenges
Geopolitical Risks: Tensions between the United States and China pose a significant risk. With China being a major market for ASML's lithography systems, escalating U.S. export restrictions could impact revenues.
Market Volatility: ASML's stock has experienced significant declines, partly due to muted guidance for 2024 and 2025. Investor concerns about weaker order intake, especially in the mobile and PC markets, have weighed heavily on the stock.
High Production Costs: The complexity and high production costs of ASML's High Numerical Aperture Extreme Ultraviolet (High NA EUV) systems create short-term margin pressures. Scaling production of these advanced systems is expected to continue affecting profitability.
Client Spending Cuts: Key clients in the semiconductor sector have been cutting back on spending and investment, which affects ASML's sales and revenue projections.
Macro Challenges: Broader economic factors, such as inflation and interest rate fluctuations, also impact ASML's financial performance and market stability.
Technical Analysis
From a technical perspective, ASML has been trading within a long-term 50 Day MA hannel. When it falls to the lower part of this channel, it’s historically been a good buying opportunity. While short-term traders may have different strategies, if you’re looking at this as a long-term investment, it’s wise to start accumulating shares when the stock moves below the middle of the channel. This is a form of dollar-cost averaging, where you add to your position gradually as the stock moves lower. If the stock reaches the bottom of the channel, that’s when it’s time to “back the truck up” and make a larger investment.
Valuation
From a valuation standpoint, ASML has typically traded at a high multiple due to its wide moat in the industry and strong market position. While its revenues and profits can be somewhat uneven due to the nature of its business, its price-to-earnings ratio has historically seen support when it falls below 40. Right now, the stock is near the lower end of that range, making it an attractive potential entry point. This aligns with the technical picture as well, which suggests that the stock may be due for a bounce.
Conclusion
When the stock hits the bottom of the channel, there will always be skeptics and critics in the comments sections of your posts, telling you that buying at these levels is a bad idea. But trust the long-term trend. The 20-year trend has proven to be much more reliable than the opinions of social media commentators.
So, when it comes to ASML, I believe it’s a strong buy both from a valuation and technical standpoint. The fundamentals of the business are excellent, and things are looking bright for the future. If you’re not already in the stock, it’s a solid addition to a semiconductor portfolio that includes other top-tier names like Nvidia, TSMC, and Broadcom. These companies dominate their sectors and have significant moats around their businesses, making them the blue-chip picks in the semiconductor industry.
Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.
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