While 2024 has been a successful year in the market, not every company has done so well. Perhaps even more surprising is that a company critical to the semiconductor supply chain is having a bad 2024. However, I think it’s ripe for a comeback in 2025.
ASML Holding (NASDAQ: ASML) is perhaps one of the most important companies on the planet, and yet few know it exists or what it does. The stock is currently down about 5% this year, but was up as much as 45% in July. Why were investors disappointed with ASML? It all has to do with expectations for 2025.
ASML makes a crucial machine for the production of microscopic chips. Extreme ultraviolet (EUV) lithography is used. These machines lay the electrical traces on chips just 3 nanometers (3 billionths of a meter) apart, although chip companies are working to bring this space even closer. Without ASML’s devices, our phones, laptops or GPUs that power AI models would not be as fast as they are today.
Moreover, the company has no competition in this area. It’s the only one making these devices, and no one is about to replicate them. It would take billions of investment dollars and years of research to catch ASML, so it has virtually secured itself as a legal technology monopoly. Any time you get the chance to invest in one of these companies, you should do so as they are quite rare on the market.
However, ASML’s monopoly has put the company on the government’s radar – just not for antitrust reasons. Western governments such as the US and the Netherlands (where ASML is based) do not want these devices to fall into the hands of China or its allies, so they have imposed an export ban on the most advanced machines and have recently denied licenses to maintain some machines in China.
As a result, sales to China are expected to decline. In addition, China’s economy is not great at the moment, so the expansion of chip production capacity may also be suspended. This does not bode well for ASML, as 47% of third quarter revenue went to China. However, management expects sales in that country to represent approximately 20% of total sales by 2025, which they believe represents a more historically normal exposure level.
Nevertheless, this effect caused management to lower its turnover forecast for 2025 from 30 billion to 40 billion euros to 30 billion to 35 billion euros. This caused investors to dump the stock, and it sold off by 20% after the earnings release.
While some of this sell-off was justified, I think the depths of the decline present a buying opportunity for investors as this response was short-sighted.
