ASML (ASML) has been a top performer on the stock market so far in 2023 with gains of more than 20%. The returns can be attributed to the semiconductor equipment giant’s terrific earnings results released in February and outstanding guidance for the short and the long run.
As such, it won’t be surprising to see ASML stock head higher for the remainder of the year. But the best part is that the chipmaker could sustain its impressive momentum for a long time to come and significantly multiply investors’ wealth over the next five years. Let’s look at the reasons why.
ASML can grow at a faster pace in the future
ASML’s earnings increased at an annual rate of 27% over the past five years. Analysts anticipate a faster growth rate of nearly 30% for the next five years. The good part is that ASML can likely live up to Wall Street’s expectations because the industry it is operating in is set to expand at a faster pace in the future.
The global semiconductor industry generated $412 billion in revenue in 2017. That number jumped to $601.7 billion last year, clocking a compound annual growth rate of nearly 7.9%. Fortune Business Insights estimates that annual semiconductor revenue could rise at a quicker pace in the future, forecasting a 12.2% annual increase through 2029 and hitting $1.38 trillion in annual revenue.
The faster growth in the semiconductor industry’s revenue is going to be an important catalyst for ASML, which supplies photolithography equipment to chipmakers and foundries so that they can manufacture chips. The importance of ASML’s equipment can be understood from the company’s massive backlog and the pace at which customers have been placing orders for its offerings.
In 2022, ASML received bookings worth 30.7 billion euros for its semiconductor manufacturing equipment, an increase of 17% over the prior year. These bookings refer to the equipment sales orders for which it has received written authorizations. It is also worth noting that ASML’s 2022 bookings exceeded its full-year revenue of 21.2 billion euros by a wide margin.
Additionally, the healthy order inflow meant that ASML finished 2022 with a backlog of 40.4 billion euros, a massive jump of 67% compared to 2021. This explains why ASML is forecasting at least 25% revenue growth this year to 26.5 billion euros. The company can easily deliver on its forecast given the huge backlog, and it won’t be surprising to see it exceed that figure if it can fulfill more orders.
More importantly, the robust demand for ASML’s equipment is here to stay for a long time to come given the impressive expansion that the extreme ultraviolet (EUV) lithography market is expected to see in the coming years. Mordor Intelligence forecasts nearly 17% annual growth in sales of EUV lithography equipment through 2028. Given ASML has a monopoly in this market and sells each EUV lithography machine for about $200 million, it is in a solid position to capitalize on the end market’s growth.
Can the stock triple?
ASML is confident in sustaining impressive growth in the long run and hitting 35 billion euros in revenue by 2025, which would be a two-thirds jump over last year’s top line. The Dutch giant estimates that revenue could increase to 52 billion euros at the midpoint of its guidance range by 2030. As such, it won’t be surprising to see the company deliver the 30% annual earnings growth that Wall Street is expecting from it over the next five years.
If that’s indeed the case, ASML’s bottom line could rise from this year’s consensus estimate of $20.58 per share to $76.41 per share by the end of 2028. Multiplying the projected earnings with ASML’s price-to-earnings ratio of 33 would translate into a stock price of $2,520, which is over three times its current share price. So, investors looking for a growth stock should consider buying ASML before it heads higher because it is unlikely to take its foot off the gas.
— Harsh Chauhan
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Source: The Motley Fool