Prediction: ASML Will Beat the Market. Here's Why.

It's only February, but it's already been a wild year for semiconductor stocks.

The launch of a new chatbot from Chinese AI start-up DeepSeek led to the biggest single-day loss ever in value for the chip sector. DeepSeek claimed to have spent just $5.5 million to train its model and used more efficient architecture to generate results that were similar to state-of-the-art "frontier models" from the likes of OpenAI, Alphabet, and others.

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Since then, investor nervousness has settled down as big tech companies have reaffirmed their commitment to spending on capital expenditures to drive progress in artificial intelligence. All of the big cloud infrastructure companies and Meta Platforms pledged to increase spending on capex, which should drive more revenue toward Nvidia and the rest of the semiconductor sector.

One of the stocks that is poised to win over the long term from the AI boom is ASML (NASDAQ: ASML), the leading maker of lithography equipment used to make semiconductors. Let's take a look at three reasons why ASML looks like a good bet to outperform the market.

Image source: Getty Images.

1. The stock is on sale

The semiconductor equipment sector operates on a different cycle than chipmakers do, and demand has been underwhelming in recent quarters. Restrictions on exports to China have also weighed on the sector.

As a result, ASML stock is now down 32% from its peak last July, but for patient investors, that sell-off sets up a buying opportunity.

The company is on track to return to growth in 2025, forecasting revenue of 30 billion to 35 billion euros, or 15% growth from the 28.3 billion it reported in 2024.

In the fourth quarter, the company also delivered solid sequential growth and reported strong bookings of 7.1 billion euros, indicating that the plunge in bookings in the third quarter was just a one-time blip. In addition to ASML's revenue forecast, the company also sees gross margin improving from 51.3% to between 52% and 53%, which should pay off on the bottom line.

2. The company has a wide economic moat

There's no shortage of commentary about the importance of competitive advantages, but ASML has one of the strongest economic moats in tech.

The company, which has been developing lithography equipment for decades, is the only producer of extreme ultraviolet lithography (EUV) equipment in the world, and EUV machines are necessary for making the most advanced chips. ASML's machines work by using light to transfer complex circuit patterns onto silicon wafers.

These machines are very expensive and complex, creating high barriers to entry, as no other company has the technology to match ASML. As billions from TSMC, Intel, and others pour into new foundries, ASML looks well positioned to benefit as semiconductor manufacturers are poised to increase spending over the coming years.

3. The AI tailwind is coming

While AI has taken over the narrative in the semiconductor industry, the majority of the industry is still devoted to conventional chips.

However, AI demand will drive growth for ASML.

On the fourth-quarter earnings report, CEO Christophe Fouquet said, "Artificial intelligence has become the key driver for growth in our industry at this moment." He also noted that strong AI demand could lead to additional capacity coming online, which would lead the company to hit the high range of its guidance.

Based on increasing demand for high-performance computing and high bandwidth memory, the company expects 2030 revenue of 44 billion to 60 billion euros, which represents 13% annual growth at the high end of that range.

Additionally, the company sees gross margins moving significantly higher to between 56% and 66%, which would drive significant growth in profit.

If AI stocks keep climbing, ASML is well positioned to be a winner.

Should you invest $1,000 in ASML right now?

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Jeremy Bowman has positions in ASML, Meta Platforms, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends ASML, Alphabet, Intel, Meta Platforms, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: short February 2025 $27 calls on Intel. The Motley Fool has a disclosure policy.