Prediction: ASML Stock Will Soar Over the Next 5 Years. Here's 1 Reason Why.
Key Points
ASML has a near-monopoly on equipment necessary for chip manufacturing.
That privileged position has allowed the Dutch company to earn fat profit margins.
The growth of AI, cloud computing, and other technologies should provide a tailwind.
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Shares of semiconductor equipment maker ASML Holding (NASDAQ: ASML) have soared more than 1,100% over the past decade with an average annual gain of 28%. How will ASML perform over the coming five years? I suspect it will soar more.
Why? Semiconductors will remain in high demand. They're necessary to fuel the growth of artificial intelligence (AI), cloud computing, and more -- and ASML has a near-monopoly on the fancy lithography machines used to make them. This equipment etches intricate circuitry onto silicon wafers, and it is the only supplier of advanced extreme ultraviolet systems (EUVs), too.
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The company's financials are impressive. Gross profit margins have been above 50% for the past few years, and net margins -- the portion of every dollar of revenue kept as profit -- have topped 25%. As of the end of June, the net margin was above 30%!
The company is a dividend payer, too. Its recent dividend yield was only 0.73%, but the payout has been growing briskly, with its recent annual total payout of $7.15 per share up from $3.35 in 2021 and $1.39 in 2018.
Image source: Getty Images.
Also, more than 90% of its lithography systems sold in the past 30 years are still in use. You might assume that's not great, since it means customers don't need to replace them very often.
But we're talking about very expensive systems here, and their long life means customers are locked into service contracts for a long time, delivering dependable revenue. Also, once a customer has spent millions on ASML equipment, it's not going to be easy to switch to another provider, if there were one. This is a competitive advantage.
At recent levels, the stock is fairly valued, roughly speaking, with a forward-looking price-to-earnings (P/E) ratio of 35 vs. a five-year average of 34. Long-term investors might want to take a closer look at ASML Holding. See if you think it will soar over the coming years, too.
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Selena Maranjian has positions in ASML. The Motley Fool has positions in and recommends ASML. The Motley Fool has a disclosure policy.
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