As almost every investor knows by now, artificial intelligence (AI) has been the driving force behind the current bull market since its inception in 2023.
The launch of OpenAI’s ChatGPT has sparked a new arms race in the industry, and generative AI technology could be as transformative as the internet. While stocks with exposure to artificial intelligence, such as the semiconductor sector, have generally performed well, some stocks have outperformed others.
Nvidiafor example, just set another all-time high on rising demand for its new Blackwell platform, but not every AI stock has kept up Nasdaq Compositewhich almost reached a record high earlier this week. In reality, ASML (NASDAQ: ASML) is now down 34% from its peak earlier this year, after the industry bell made a disappointing forecast in its third-quarter earnings report on Tuesday. The stock fell 16.3% after the news.
Why ASML shares just went on sale
ASML holds a unique position in the semiconductor industry as the only maker of extreme ultraviolet (EUV) lithography machines, which are used to create the most advanced chips with the smallest nodes.
Investors have been looking forward to a recovery in ASML’s business after an earlier slowdown due to macro challenges such as high interest rates and inflation.
ASML is expected to benefit from the expansion of chip factories around the world as governments and industries prepare for the AI era. For example, the US plans to invest tens of billions of dollars in foundry construction through the CHIPS Act. Taiwanese semiconductorThe world’s largest foundry operator is looking to diversify beyond Taiwan and get closer to its customers.
Although that should be a boost for ASML, the company just told customers that the recovery would take longer than expected. Citing weakness in both the logic and memory segments, which make up two of the three business segments, CEO Christophe Fouquet said: “It now appears that the recovery is more gradual than previously expected.” He also noted the caution of customers.
ASML has reversed the 2025 revenue forecast it made at Investor Day 2022 from 30 billion euros to 40 billion euros ($33 billion to $43 billion) to 30 billion euros to 35 billion euros ($33 billion to $38 billion) ). It’s no surprise that investors were disappointed with the news.
Why it’s a buying opportunity
Companies tend to provide disappointing earnings reports and forecasts for two reasons: either there are challenging market conditions at a macro or industry level, or the company itself is not performing well and is falling behind the competition.
ASML’s case seems to fall safely into the first category. While there is plenty of excitement about AI, which management nodded to, there are still some challenges in the legacy chip business, reflected in key customers such as Intel And Samsungboth of whom are having a hard time.
Samsung is reportedly delaying mass production at a Texas factory due to weak yields from its 3-nanometer process, and Intel just announced a massive restructuring, putting its foundry expansion into question. In recent quarters, half of the ASML company’s sales also came from China, where the economy has been weak since the end of the pandemic.
For comparison, a good recent example of a company facing similar headwinds was Alphabet as digital advertising slowed in 2022 due to recession fears, as you can see in the chart below.
As you can see, revenue growth fell to just 1% in Q4 2022, but if you had bought the stock then you would be up over 80% now.
ASML retains a significant competitive advantage as the sole manufacturer of EUV lithography machines, and should ultimately benefit from the coming chip manufacturing boom driven by AI.
Even with the downward revisions, the company is still calling for 16.1% growth at the midpoint and expects growing gross and operating margins.
With earnings recovering, the stock looks like a good bet to bounce back now that the weak forecast has been priced in. With its unique EUV technology, strong margins and increasing demand for AI, ASML seems like a good bet to be a winner in the long term. term.
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Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends ASML, Alphabet, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: Short November 2024 $24 Calls on Intel. The Motley Fool has a disclosure policy.
With a 34% decline, this AI stock is a no-brainer buy stock right now Originally published by The Motley Fool
