The biggest winners in the stock market over the past two years have all been large companies that fueled the biggest innovations in artificial intelligence (AI).
Nvidia is the poster child for big AI stock winners. The GPUs are essential equipment for training and running large language models. The company has seen its shares rise 865% in the past 24 months, leading to a 10-for-1 stock split in June.
Nvidia was far from the only AI-powered stock to split shares this year. It was accompanied by Broadcom, Super microcomputerAnd Lam Researchall of which performed splits.
A stock split isn’t necessarily a catalyst for a stock to zoom higher. The fundamental value of a company does not change when management decides to split the stock. And in today’s era of fractional shares, this has only a small impact on making the stock more accessible to retail investors.
But a stock split is a sign of management’s confidence that the stock will continue to rise, and few people have more insight into the future of a company and its stock than management.
So investors are rightly interested in what could be the next stock to undergo a split. One company essential to the supply of AI semiconductors seems like a great candidate: ASML Holding (NASDAQ: ASML). And at the current share price, investors should want to buy the stock before it announces a split.
An essential part of the supply chain
ASML builds and maintains photolithography machines, which semiconductor manufacturers use to produce the chips designed by companies like Nvidia. In short, without ASML’s machines there are no AI chips.
It is the sole supplier of extreme ultraviolet lithography (EUV) machines, a necessary technology for printing the most advanced chips, such as those used in AI data centers for training and running large language models. When a manufacturer prints a high-quality semiconductor, he uses ASML machines.
Customers include: Taiwanese semiconductor manufacturing, IntelAnd Samsung. All three renovated their foundries about ten years ago to accommodate ASML’s machines.
But the company doesn’t rely on selling more machines each year to drive revenue growth. The company receives ongoing revenue from the maintenance of machines already in use and the sale of replacement parts. Recurring maintenance revenues should increase as more machines are installed in chip makers’ foundries.
ASML’s revenues from its installed base have grown significantly faster than system sales over the past fifteen years as foundries add more equipment to their operations while maintaining and updating old equipment. And given the long lifespan of ASML’s machines (25 to 30 years), that is a steady and growing source of revenue with high margins.
Newer machines using the latest EUV technology will come into use next year. And the increased complexity of the high-end machines could result in even greater revenues from service and replacement parts compared to older machines.
The future looks bright
ASML called 2024 a transition year. It expects no sales growth and forecasts a contraction in gross margin this year as it prepares to sell its latest EUV machines.
That’s in stark contrast to a company like Nvidia, which has seen sales and profits increase in 2024. So it’s no wonder that investors haven’t been nearly as enthusiastic about ASML as they have been about major chipmakers.
But that could be an opportunity for patient, long-term investors. ASML expects 2025 to be a big year. Management’s outlook predicts sales of between 30 billion and 40 billion euros ($33.17 billion to $44.2 billion) next year as foundry openings with the latest machines come online. At the halfway point, this means an increase of 27% compared to 2023.
At its 2022 investor day, management gave 2030 revenue guidance of between $48.65 billion and $66.34 billion. Considering this was before the AI boom really took off, it’s a good bet that revenues will come in on the high side. Management could adjust this guidance to a higher or narrower range on the next investor day in November.
In addition to revenue growth, management expects strong margin expansion. It expects gross margins between 54% and 56% in 2025 and 56% and 60% in 2030. And while it hasn’t explicitly forecast operating margin expansion, it should see good operating leverage from its research and development and sales activities. and administrative costs as revenues climb toward the $66 billion mark.
All of that should translate into very strong earnings growth. And given the technological lead and relationships ASML already has with the largest foundries in the world, there shouldn’t be much in the way of achieving these numbers.
Will this be the next big stock split?
ASML is currently trading around $835 per share. While that’s a far cry from the all-time high of around $1,100, it’s still a pretty high price. Shares have been split at much lower prices.
The company last conducted a forward split in the late 1990s and 2000s, during the dot-com boom. With a strong outlook based on continued spending to build the next generation of AI chips, ASML could be motivated to split its shares in the near future as it sees significant growth ahead.
Even without a stock split, you can consider adding stocks to your portfolio. The stock is currently trading at about 26 times forward earnings estimates. Given the potential for strong and predictable sales growth and margin expansion in the coming years, the company should be able to deliver earnings growth that more than justifies this slight premium on overall profits. S&P500. And if you compare ASML’s price to other AI stocks, it’s an absolute bargain.
Should you invest €1,000 in ASML now?
Please consider the following before purchasing shares in ASML:
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Adam Levy holds positions in Taiwan Semiconductor Manufacturing. The Motley Fool holds positions in and recommends ASML, Lam Research, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and Intel and recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.
This could be the next big stock split in artificial intelligence (AI). Here’s why you should buy it before it happens. was originally published by The Motley Fool
