ASML: Is the Stock a Buy as Demand for EUV Lithography Machines Soars?

One of the most important but sometimes overlooked companies on the planet is semiconductor equipment maker ASML (NASDAQ: ASML). It has a practical monopoly on extreme ultraviolet (EUV) lithography technology, as no other company has been able to build such equipment. Without ASML's machines, there would not only not be artificial intelligence (AI), but we also wouldn't have the chips that power our smartphones. And with demand for those EUV machines booming, the stock looks like a buy.

Chip foundry expansions are propelling demand

ASML's EUV machines are key to the manufacture of both advanced logic chips (such as graphics processing units) and high bandwidth memory (HBM). With demand for both of those types of chips outpacing supply, chipmakers are building more chip fabs, and as a result, demand for ASML's equipment is jumping. In response, it too plans to increase its manufacturing capacity.

The company said that orders for its EUV machines were already close to accounting for its full manufacturing capacity through next year, even after plans to increase its output by 30%. Management is also looking into increasing its capacity by an additional 30% in 2028.

ASML management said that both its logic and memory customers continue to accelerate their own capacity expansion plans, giving it increased long-term visibility into demand trends for its equipment. It highlighted that both types of customers are also now signing long-term agreements with their own largest customers.

In the second quarter, its revenue climbed 21% year over year to 9.3 billion euros ($10.7 billion), which came in well above the company's guidance range of 8.4 billion to 9 billion euros ($9.6 billion to $10.3 billion). Equipment sales rose by 18% to 6.6 billion euros ($7.6 billion), while service revenue climbed 33% to 2.8 billion euros ($3.2 billion).

During the quarter, the company sold 86 new lithography systems and five used systems, compared to 66 new and nine used systems in the prior-year period. Approximately 56% of its sales came from higher-priced EUV technology, versus 48% a year ago. Also, 14% of its sales were to China, down from 27% a year ago.

Looking ahead, the company forecast third-quarter revenue would be between 11 billion euros ($12.6 billion) and 12 billion euros ($13.8 billion), and guided for 2026 revenue in the range of 43 billion euros ($49.3 billion) and 45 billion euros ($51.6 billion), up from a prior guidance range of 36 billion euros ($41.3 billion) to 40 billion euros ($45.9 billion).

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Why ASML stock is a buy

While ASML's stock isn't cheap, trading at a 35.5 times forward price-to-earnings (P/E) ratio, based on analysts' 2027 estimates, the company is at the heart of the AI boom and seeing strong demand for its offerings. Because it holds a technological monopoly on vital equipment for the tech sector, it deserves to trade at a premium, and with both the AI chip and memory markets booming, the stock should be a long-term winner.

Geoffrey Seiler 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.