Is ASML Holding a Buy After Its Latest Earnings Report?

One of the lingering questions weighing on technology stocks has become all too familiar over the past year. Simply put, investors are keen to understand whether the adoption of artificial intelligence (AI) has staying power. As one of the deepest pick-and-shovel plays in the industry, all eyes were on ASML Holding (NASDAQ:ASML) heading into the company's quarterly financial report.

ASML supplies the photolithography systems used to manufacture semiconductors and has a near-monopoly on the extreme ultraviolet (EUV) lithography systems that produce advanced AI chips. As such, the company's results provide insight into the state of AI adoption.

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A classic beat and raise

For the second quarter, ASML reported revenue of 9.3 billion euros (roughly $10.64 billion), up 6% year over year. The company's gross margin continued to expand, increasing 100 basis points to 54%. This drove earnings per share (EPS) of 7.59 euros (about $8.68), also up 6%.

For context, analysts' consensus estimates called for revenue of 8.8 billion euros and EPS of 6.90 euros, so ASML cleared expectations by a fair margin. The results were also above the high end of management's guidance provided in Q1, which called for revenue in the range of 8.4 billion euros to 9 billion euros.

Helping drive the company's financial results was strong demand for its lithography systems. ASML sold 91 total systems during the quarter, up 15% year over year, comprised of 86 new systems and 5 used systems.

CEO Christophe Fouquet explained the company’s outperformance, which represents positive news for AI investors.

Ongoing AI-related investments and continued progress in AI technologies are driving demand for advanced logic and memory chips, further strengthening the semiconductor industry's growth outlook. Our customers, in turn, continue to accelerate their capacity expansion plans.

The chief executive went on to say that customer commitments across its product portfolio are "providing ASML with increased visibility into longer-term demand."

The company cited extremely strong order volume during the first half of the year as the reason for its decision to add 30% to its production capacity for 2027, and is considering an additional 30% boost for 2028.

Is the stock a buy now?

For the third quarter, management's outlook calls for revenue of 11 billion to 12 billion euros, which would represent year-over-year growth of 53% at the midpoint of its guidance -- a notable acceleration of its growth. ASML also expects its gross margin expansion to continue, increasing to between 55% and 57%. Management raised the company's full-year guidance for the second time in as many quarters, forecasting total sales of 44 billion euros at the midpoint of its guidance.

ASML's decision to increase production capacity suggests it has orders to support the additional capex. This, combined with the company's increased full-year guidance and management's bullish commentary, shows that demand for AI remains strong.

There is the matter of ASML's valuation. The stock currently sells for 35 times next year's expected earnings, which is clearly pricey. However, as I previously pointed out, the company has a near-monopoly on EUV lithography systems that produce the most advanced AI chips.

That helps illustrate why ASML is deserving of a premium and why the stock is a buy.

Danny Vena, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML. The Motley Fool has a disclosure policy.