ASML Holding (ASML) has long been a dominant player in the semiconductor industry, with its cutting-edge lithography machines essential for producing advanced chips. The stock has seen impressive growth over the past two years, rising approximately 60%. 

However, recent developments have raised questions about whether it’s time for investors to reassess their positions. ASML shares have pulled back by about 28% since reaching their highs in July 2024, largely due to trade and export control tensions fueled by the Biden administration’s ongoing efforts to tighten regulations around semiconductor technology. These new clampdowns, specifically aimed at restricting China’s access to advanced chip-making equipment, have added a layer of uncertainty for the company.

Despite these headwinds, analysts remain largely optimistic about ASML’s long-term prospects. The company continues to hold a consensus “Strong Buy” rating, and with plenty of upside to its mean price target, some investors may see this as a buying opportunity rather than a time to exit.

In this article, we’ll explore the key factors driving ASML’s recent downturn, assess the risks associated with the ongoing geopolitical landscape, and determine whether the stock still holds promise for those looking to capitalize on its future growth. Is it time to hit the exits, or does ASML’s strategic position in the semiconductor industry make it worth holding on to? Let’s dive in.

About ASML Holding N.V. Stock

Valued at $315.7 billion, ASML Holding N.V. (ASML) is a global leader in producing advanced technology systems for the semiconductor industry. The company provides a comprehensive portfolio for manufacturing complex integrated circuits. ASML designs, develops, integrates, markets, and services advanced systems utilized by major semiconductor manufacturers worldwide. These systems are essential for producing chips that power a diverse range of electronic, communications, and information technology products.

Although ASML stock has retreated around 28% from its mid-July peak, due in large part to trade and export control tensions, it's still up approximately 60% over the past two years.

Biden Administration Rolls Out New Export Controls of Advanced Tech

On Sept. 5, the Biden administration announced the addition of several technologies, including quantum computing, to its export control list, citing the enhancement of national security as the reason.

The new export control list, aimed at countries like China, includes quantum computing along with related software and hardware, “advanced” semiconductor manufacturing equipment, gate-all-around field-effect transistor technology, and additive manufacturing equipment and components capable of producing metal or metal alloy parts. 

The proposed rules apply to all global exports, but offer licensing exemptions for countries that adopt similar regulations, such as Japan and the Netherlands, where ASML Holding is based. A 60-day public comment period will precede the government’s issuance of the final rules.

Following that, on Sept. 6, the Dutch government announced that it would expand export licensing requirements for certain ASML chipmaking equipment, effectively taking back control from the U.S. and synchronizing the policies of the two countries. ASML stated that it does not anticipate the shift in oversight to affect its earnings either this year or in the future.

Analysts Turn Cautious on ASML Stock

On Sept. 6, BofA reduced its price target for ASML to 1,064 euros from 1,302 euros, while maintaining a “Buy” rating on the shares. The firm reduced ASML’s fiscal 2025 and 2026 earnings estimates by 11% and 8%, respectively, due to lower revenue assumptions. 

However, BofA considers the company’s risk/reward ratio “highly attractive” at current share levels, noting that ASML’s current multiples are below its five-year median. ASML remains BofA’s “Top Pick” among European semi-caps, and the firm views the recent pullback as a “particularly enhanced buying opportunity.”

On Sept. 5, Morgan Stanley lowered its price target on ASML to 925 euros from 1,000 euros and kept an “Overweight” rating. Morgan Stanley analysts also dropped the shares from their “Top Pick” list in favor of Arm (ARM). Further, the firm reduced its 2025 and 2026 forecasts for ASML due to anticipated reductions stemming from a knock-on impact related to Intel (INTC). 

Morgan Stanley believes that China represents the greatest source of uncertainty for ASML, largely due to concerns about heightened restrictions and the potential cessation of substantial spending on mid-critical nodes. However, the firm still sees ASML as a “growth cyclical name with high-quality earnings… That said, we believe AI infrastructure spending will remain strong and view the recent P/E de-rating of ASML as a buying opportunity,” the analysts added. “The growth in leading-edge logic and memory (including HBM) augurs well for ongoing order book recovery, and we still expect ASML sales to grow for the next 2-3 years.”

On Sept. 4, UBS downgraded ASML to “Neutral” from “Buy” with a price target of 900 euros, down from 1,050 euros. UBS told investors in a research note that the company's lithography intensity is leveling off in both logic and memory sectors, and the demand from artificial intelligence (AI) is not enough to counterbalance this trend. The firm anticipates that the investor narrative will start to shift towards 2026 and 2027, and foresees potential downside risks to consensus estimates.

How Did ASML Perform in Q2?

On July 17, ASML Holding reported its Q2 earnings results. The computer equipment manufacturer’s total revenue increased by 18% sequentially to 6.24 billion euros in the second quarter, reaching the high end of the company’s guidance. Revenue growth was primarily fueled by increased sales of immersion systems. It achieved gross margins of 51.5%, surpassing the margins reported for the entire year of 2023. GAAP EPS was reported at 4.01 euros for the quarter.

Net bookings surged approximately 54% quarter-over-quarter to 5.57 billion euros. Net bookings for ultraviolet lithography, or EUV, machines totaled 2.5 billion euros in the second quarter, up from 656 million euros in the first quarter of 2024. Notably, net booking rose around 24% year-over-year.

As ASML anticipates demand growth through 2025, this year marks the first time the company is pre-building its inventory in anticipation of incoming orders. While meeting demand has posed challenges in the past, it has not been an issue so far in 2024.

“In line with previous quarters, overall semiconductor inventory levels continue to improve, and we also see further improvement in litho tool utilization levels at both Logic and Memory customers. While there are still uncertainties in the market, primarily driven by the macro environment, we expect industry recovery to continue in the second half of the year,” said ASML President and Chief Executive Officer Christophe Fouquet.

It is important to note that China remains ASML's largest market. According to the company’s investor presentation, China contributed 49%, or approximately 2.33 billion euros, to the total net system sales of 4.76 billion euros for the second quarter of 2024. Notably, CFO Roger Dassen maintains that ASML does not focus on country-specific markets to assess demand; instead, it considers overall global chip demand and does not create models specific to any country.

It’s also worth noting that the company bought back shares worth 96 million euros in the second quarter under the ongoing 2022-2025 share repurchase program. On Aug. 7, ASML Holding paid an interim dividend of 1.52 euros per ordinary share.

Management anticipates total net sales for the third quarter to range between 6.7 billion euros and 7.3 billion euros, with a gross margin between 50% and 51%. For 2024, the company anticipates net sales to be similar to 2023, with a slightly lower gross margin.

The China Risk

With the Biden administration aiming to prevent advanced semiconductor chips and equipment from reaching Beijing, this poses a potentially significant risk to ASML’s business. At the same time, the recent announcement that ASML might be exempt from stricter restrictions has alleviated some investor concerns. The administration asserts that the exemptions are temporary, although it has not specified when they will be reevaluated. ASML Holdings has received a reprieve, but the duration of this relief remains uncertain.

ASML may face challenges if the trade war intensifies, but given the anticipated growth next year and the ongoing increase in demand, it’s uncertain whether these setbacks will be severe enough to significantly affect the company's bottom line.

Meanwhile, Bloomberg News recently reported that China is stockpiling chip equipment in anticipation of stricter regulations with the transition to a new administration in early 2025, following the outgoing Biden administration. Therefore, China is expected to remain a driving force for ASML if the country continues to stockpile chip equipment at the current pace or even accelerates it.

Is ASML Stock Overvalued?

Analysts tracking ASML Holding forecast a 5.34% year-over-year decline in the company’s earnings to $20.38 per share for fiscal 2024. Additionally, Wall Street expects ASML’s full-year revenue to stay roughly flat year-over-year at $30.60 billion. However, with the industry anticipated to hit the bottom in 2024, growth is expected to resume in 2025. 

Assessing ASML’s valuation, the stock is trading at 36.14 times the consensus earnings estimate for FY24, significantly above the sector median of 23.17x. However, the multiple closely aligns with its five-year average of 40.07x, indicating that the stock may not be overvalued, given its fundamentally strong thesis.

Options Market Sentiment on ASML Holding Stock

Examining the October 18, 2024, option chain, there is a bid/ask spread of $46.90/$49.10 for the $800.00 CALL option and $41.70/$43.60 for the $800.00 PUT option. Keep in mind that this options strike is the closest to the current stock price. We can calculate the expected price movement by using the midpoint prices of these options:

42.65 (800.00 put) + 48.00 (800.00 call) = 90.65/800.14 = 11.3%

Based on current prices, the options market indicates that ASML stock may either increase or decrease by about 11% from the $800.00 strike price by the October options expiration, employing the long straddle strategy. That would place the stock in a trading range of about $712.12 to $888.15. 

Notably, at the $800.00 strike price, there are approximately three times as many open puts as open calls, with 535 open puts compared to 181 open calls. This suggests a bearish sentiment in the options market and indicates a greater likelihood that the stock's value will decrease.

What Do Analysts Expect For ASML Stock?

Analysts have a consensus rating of “Strong Buy” on ASML Holding stock. Out of 19 analysts covering ASML stock, 15 recommend a “Strong Buy” and the remaining four maintain a “Hold” rating. The mean target price for the stock is $1,154.75, indicating an upside potential of about 44% from the current price.

The Bottom Line on ASML Stock

All things considered, I don’t believe investors should exit ASML stock, as there are no alarming signs at the moment. Instead, I would rate it as a “Hold.” 

On the one hand, there are strong fundamentals supported by the industry’s expected recovery next year. Also, Wall Street analysts remain optimistic about the stock, as reflected in the consensus rating - even as some have started to express caution by lowering their estimates and price targets for the company. In addition, the company’s valuation looks reasonable. 

On the other hand, China continues to pose a significant geopolitical challenge, with potential uncertainties increasing as a new administration takes office in early 2025. In addition, sentiment in the options market underscores a cautious outlook for the company.

On the date of publication, Oleksandr Pylypenko did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.