The stock market has rewarded handsomely Nvidia‘s dominant position in artificial intelligence (AI) chips with stunning gains of over 222% in the past year. And the company has justified this red-hot rally quarter after quarter with stellar growth.
Such phenomenal growth in Nvidia’s sales and revenues comes down to the fact that it controls a whopping 98% of the AI chip market. Market research agency Gartner estimates that the AI semiconductor market could generate $71 billion in revenue by 2024. If Nvidia manages to maintain its grip on this market, it could witness a massive jump in data center revenue from the previous fiscal year’s $47.5 billion level.
So there’s a real chance that Nvidia can stay the course and remain a top AI growth stock going forward. However, if you missed Nvidia’s stellar rise over the past year and are worried about the stock’s valuation, there’s a solid alternative to buy: ASML Holding (NASDAQ: ASML).
Let’s take a look at the reasons why ASML is one of the best AI stocks to buy right now.
ASML Holding’s machines have enabled Nvidia’s AI dominance
ASML’s extreme ultraviolet (EUV) lithography machines could be the biggest reason Nvidia dominates the AI chip market. With these machines, Nvidia’s foundry partner, Taiwanese semiconductor manufacturing companyalso known as TSMC, to manufacture chips using advanced, smaller process nodes.
According to ASML, “Chipmakers use our NXE systems to print the highly complex base layers of their 7nm, 5nm and 3nm nodes.” Nvidia’s hugely popular H100 AI GPU (graphics processing unit) is manufactured on a 5-nanometer (nm) process node, while the upcoming Blackwell generation chips will reportedly be manufactured on a 4nm process from TSMC.
Additionally, Nvidia’s recently announced Rubin chips, which are expected to be released in late 2025, are expected to be manufactured using a 3nm process. Not surprisingly, chipmakers and foundries are lining up to purchase ASML’s advanced chip manufacturing equipment to meet robust AI-driven demand. The Dutch semiconductor equipment manufacturer will ship its latest EUV machine to Intel and TSMC later this year.
Priced at a whopping $380 million, this machine will enable ASML customers to manufacture chips that will be 1.7 times smaller than previous generation machines. These chips are expected to be used for AI-related workloads. The transistors are packed more closely together on chips manufactured using smaller process nodes, allowing electrons to move faster and resulting in more computing power. Because the electrons have to travel a shorter distance, the heat generated in these advanced chips is lower and they are more energy efficient.
Meanwhile, chipmakers’ investments to expand their production capacity will help ASML. For example, a TSMC-backed chipmaker recently announced it will invest $7.8 billion in a new chip factory in Singapore. Furthermore, growing demand for AI chips will likely drive chip manufacturers to purchase more EUV lithography equipment.
Data Bridge Market Research estimates that the global EUV lithography market could generate $40.5 billion in revenue by 2031, up from $9.4 billion last year. Given that ASML has a monopolistic position in the EUV lithography market, the company appears to be in a position to continue growing at a healthy pace in the long term.
The company’s growth will accelerate
ASML closed 2023 with a turnover of 27.6 billion euros, an increase of 30% compared to the previous year. The company expects a similar level of sales this year as the semiconductor industry’s sales fell in 2023, which has prompted ASML customers to hold off on purchasing new equipment this year as they work through the bottom.
ASML expects to grow again from 2025 and its enormous order book of 38 billion euros will play a key role in driving that turnaround. The following graph indicates that ASML’s turnover could increase by 30% next year.
Analysts expect the company to also deliver healthy net growth, thanks to the impressive momentum its business is expected to gain.
ASML shares are up 44% in the past year, which is lower than the 52% gain achieved by the PHLX semiconductor sector Table of contents. However, the situation could change in the future thanks to catalysts such as AI that could drive demand for the company’s offering.
With ASML currently trading at 14 times revenue, which is a big discount to Nvidia’s multiple of 38, investors can get their hands on this AI stock at a relatively attractive valuation. Consider seizing this opportunity before ASML shares start to rise based on the crucial role it plays in the AI chip market.
Should you invest €1,000 in ASML now?
Consider the following before buying shares in ASML:
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends ASML, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Gartner and Intel and recommends the following options: long January 2025 $45 calls to Intel and short August 2024 $35 calls to Intel. The Motley Fool has a disclosure policy.
Did you miss Nvidia’s Run-Up? My Best Artificial Intelligence (AI) Stock to Buy and Hold was originally published by The Motley Fool
