ASML Stock: Buy, Sell or Hold?

ASML's (NASDAQ: ASML) stock plummeted 16% on Oct. 15 after it accidentally posted its third-quarter earnings report a day ahead of schedule, and the numbers weren't impressive.

The Dutch semiconductor equipment maker's net sales rose 20% year over year to 7.47 billion euros ($8.14 billion), which missed analysts' estimates by 430 million euros. Its net bookings only increased 1% to 2.63 billion euros ($2.86 billion) and missed the consensus forecast by a whopping 2.73 billion euros.

ASML's gross margin also declined by 110 basis points year over year to 50.8%. On the bottom line, its earnings rose 10% to 5.28 euros ($5.75) per share but missed analysts' expectations by 0.28 euros.

Image source: Getty Images.

ASML followed up those grim headline numbers with a disappointing near-term outlook. It expects revenues to rise 22% to 28% year over year in the fourth quarter, but to only rise about 1% to 28 billion euros ($30.5 billion) for the full year. That would represent its slowest full-year growth in nine years. For 2025, it expects its revenue to grow between 7% and 25% -- compared to its previous outlook for up to 43% growth. Should investors buy, sell, or hold ASML stock after that disappointing earnings report?

Why is ASML's growth cooling off?

ASML's photolithography systems are used to optically etch circuit patterns onto silicon wafers. It's the world's leading manufacturer of deep ultraviolet (DUV) lithography systems, which are used to produce older chips, and the only supplier of extreme ultraviolet systems (EUV), which are required to produce the world's smallest, densest, and most advanced chips.

A single EUV system costs about $180 million and requires multiple planes to ship, but all of the world's leading chip foundries -- including TSMC, Samsung, and Intel -- use those machines for their high-end chips. ASML's new "high-NA" EUV systems, which are used to produce even smaller chip traces, currently cost about $380 million.

That's why ASML is widely considered a linchpin and bellwether of the semiconductor market, but its growth is highly cyclical and tethered to the major chipmakers' upgrade cycles. Tighter export curbs are also preventing it from shipping its high-end DUV and EUV systems to mainland China, which accounted for 26% of its net sales in 2023.

From 2020 to 2023, ASML's annual revenue rose by double digits as its gross margins expanded. That growth was driven by higher sales of PCs throughout the pandemic, new 5G smartphones, and the market's soaring demand for new AI chips.

Data source: ASML. Euro terms.

But in 2024, ASML expects its revenue to stall out as it grapples with the tighter export curbs for Chinese chipmakers, laps the AI market's initial growth spurt, and transitions toward its newer high-NA EUV systems.

That outlook wasn't surprising, but the bulls had expected a stronger recovery in 2025 as it overcame those headwinds and ramped up its high-NA EUV shipments. However, TSMC only recently ordered its first high-NA EUV systems and isn't in a hurry to replace its existing low-NA EUV systems with those pricier systems. Intel, which installed its first high-NA EUV systems before TSMC, is now reportedly considering a spin-off or sale of its entire foundry unit -- and those plans could disrupt its orders from ASML. Samsung is only expected to install its first high-NA EUV systems at the end of 2024.

Meanwhile, the rapid growth of the AI market is driving many chipmakers to focus on adding new AI features to their existing chips instead of developing smaller chips. That trend could exacerbate the sluggish adoption of its high-NA EUV systems.

As ASML's top customers adopt conservative high-NA EUV strategies, EU regulators are preventing it from shipping its higher-end systems to China. In other words, it's being cut off from the one market that needs its systems the most.

Is it the right time to buy, hold, or sell ASML stock?

At $730 per share, ASML stock looks reasonably valued at 27 times forward earnings. However, it could remain under pressure until it overcomes its near-term headwinds and its bookings growth accelerates again. So if you already own ASML stock, it's smarter to simply hold it and ride out the cyclical downturn instead of selling it.

But if you don't own ASML stock yet, I don't think it's the best time to buy it. Its shares could head lower as its top customers postpone their high-NA EUV purchases, the chip market cools off again, and it gets slapped with even tighter trade restrictions in China. For now, I'd personally prefer to buy more balanced chip plays like TSMC instead of ASML.

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Leo Sun has positions in ASML. The Motley Fool has positions in and recommends ASML and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.