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ASML Holding: A Very Attractive Growth Story
Stock Analysis & Ideas

ASML Holding: A Very Attractive Growth Story

ASML Holding (ASML) is one of the world’s largest manufacturers of chip-making equipment. The company features fantastic competitive advantages, including its EUV capabilities, which have essentially formed a legal monopoly field for ASML and should provide robust growth for years to come considering its ever-growing backlog.

The Netherlands-based company’s financials have been growing rapidly, while its ongoing margins expansion should increase its profitability prospects. While the stock is certainly not cheap, it’s quite likely that ASML will grow into its valuation going forward. For this reason, I am bullish on the stock.

Latest Results 

ASML recently reported its Q3 results, delivering tremendous growth year-over-year. Revenues came in at $6.1 billion (€5.2 billion), 31.3% higher year-over-year, while net bookings were $6.2 billion.

ASML’s EUV business achieved another record as far as shipments and revenues go, as well as regarding its NXE:3600D system. I am particularly excited about the company’s ongoing margins expansion, which is achieved through growing economies of scale.

Gross margins in Q3 were 51.7%, beating consensus estimates of 51.6%. Consequently, net income margins also expanded, with ASML posting €1.74 billion in net income or €4.27 per share.

For Q4, management expects around €4.9-€5.2 billion in sales and gross margins between 51% and 52%. Based on this, Q4 could mark another quarter of record net income levels. Management also expects full-year revenue growth to be around 35%, suggesting a sequential acceleration in revenue in its upcoming earnings.

Demand for ASML’s one-of-a-kind technology remains very high. Combined with the accelerated digital transformation following the COVID-19 pandemic and the ongoing chip shortage, ASML’s only problem is increasing its capacity to meet the current demand. That’s one of the better problems to have if you ask me.

Dividend and Valuation

ASML’s dividend, while growing rapidly, remains at miniature levels as the company is still in a solid growth phase. Still, the company has increased its dividend payouts over the years, with the latest dividend hike marking double-digit year-over-year growth.

The yield is rather tiny, at just around 0.51%. However, ASML’s dividend growth prospects remain very strong, and the dividend’s assistance in driving total returns higher is certainly welcome.

As part of the company’s financial policy to return excess cash to its shareholders, ASML also announced a new share buyback program. It intends to repurchase shares up to an amount of €9 billion (~$10.14 billion), which should further boost total returns.

One of my few concerns regarding ASML’s investment case would be the stock’s expanded valuation multiple. The stock trades at over 50 times its expected Fiscal Year 2021 EPS, which is undoubtedly an expensive price point.

That said, due to the company’s qualities, the stock is likely to retain a premium. Also, due to its rapid growth, the company is likely to grow into its valuation, as it has done in the past.

Wall Street’s Take

Turning to Wall Street, ASML Holding has a Moderate Buy consensus rating based on four Buys and two Holds assigned in the past three months.

At $896.85, ASML Holding stock projections suggest 14% upside potential.

Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates  Read full disclaimer >

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