Why ASML Holding Stock Just Popped
Key Points
UBS raised its price target on ASML stock by 43% this morning.
AI chips remain in deficit, and ASML builds the machines that can solve this problem.
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ASML Holding (NASDAQ: ASML) stock jumped 6.3% through 11:25 a.m. ET Wednesday after receiving a vote of support from UBS.
In a note covered on StreetInsider.com this morning, the Swiss megabanker raised its price target on ASML stock by nearly 19%, to EUR1,900 (that's about $2,210 -- about 43% more than ASML stock costs today).
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Why UBS loves ASML
It's no mystery why UBS would be raising price targets on ASML today: The reason is rising demand for artificial intelligence chips.
UBS is convinced AI chip supplies are tightening amid rising demand, driving up prices and "driving a more prolonged investment cycle extending into 2028." As arguably the key provider of machines for manufacturing semiconductor chips, ASML should directly benefit from increased investment in these machines -- which is to say increased buying of the machines by manufacturers such as Intel (NASDAQ: INTC) and Taiwan Semiconductor Manufacturing Company (NYSE: TSM).
UBS argues that ASML can produce enough machines to grow semiconductor supplies by 50% next year, and that ASML itself should be able to grow sales strongly over the next 12 to 18 months.
In UBS's opinion, this makes ASML its "top sector pick" in semiconductors.
What it means for ASML stock
Which all sounds logical, but... ASML stock has roughly doubled in price over the past year. Is it still cheap enough to buy?
That's where I start to worry UBS is getting off track. Priced at more than 48 times trailing earnings, but with earnings growth forecast at only 23% over the next five years and real free cash flow lagging reported earnings a bit, ASML is not a cheap stock.
Although a great company, growing strongly, and integral to the semiconductor supply chain, I cannot recommend ASML stock at its current price.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML, Intel, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
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