Is ASML Stock a Buy, Sell or Hold at a P/E Multiple of 26.3X?

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ASML Holding NV ASML, the world’s leading supplier of semiconductor manufacturing equipment, currently trades at a forward 12-month price-to-earnings (P/E) ratio of 26.29, significantly higher than the Zacks Semiconductor Equipment – Wafer Fabrication industry average of 21.92. This lofty valuation, combined with a recent 28.5% plunge in the stock price over the past three months, has sparked debates about whether ASML remains a worthy investment or has become overvalued.

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The decline reflects investor concerns about the company’s softened outlook for the remainder of 2024 and 2025. Since reporting third-quarter earnings in mid-October, ASML shares have tumbled 24.1%, underperforming competitors like Lam Research LRCX, Applied Materials AMAT and Advanced Energy Industries AEIS. Advanced Energy Industries shares have risen 0.4%, while Lam Research and Applied Materials have declined 18.3% and 20.9%, respectively.

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ASML’s Muted Guidance Weighs on Sentiment

ASML’s third-quarter 2024 results showcased solid financial performance, with net sales of €7.5 billion and net income of €2.1 billion, representing year-over-year growth of 11.9% and 9.7%, respectively. Earnings per share (EPS) rose by 9.8% to €5.28, signaling operational efficiency.

However, the company’s outlook for the fourth quarter and beyond has dampened investor enthusiasm. ASML guided fourth-quarter sales in the range of €8.8 billion-€9.2 billion, but its gross margin projection of 49-50% indicates persistent profitability challenges. Management also anticipates a slowdown in order intake for 2025 due to sluggish recoveries in the mobile and PC markets.

Adding to the pressure are downward earnings estimate revisions by analysts, reflecting reduced optimism about ASML’s short-term growth prospects.

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ASML’s High NA EUV Systems: A Double-Edged Sword

ASML’s pioneering High Numerical Aperture Extreme Ultraviolet (High NA EUV) systems are critical for manufacturing advanced chips required for artificial intelligence (AI) and high-performance computing. However, the ramp-up of this cutting-edge technology has strained margins.

In the third quarter, ASML shipped two High NA EUV systems, with revenues expected to be recognized by year-end. Despite their importance for next-gen chip production, these systems come with high manufacturing complexity and significant capital investments, diluting margins by an anticipated 3.5% in the fourth quarter of 2024. This near-term profitability impact could continue as ASML scales the production of these systems.

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