The semiconductor equipment industry saw a turnaround in 2024 following a difficult 2023 when sales slipped 1% to $106 billion, according to industry association SEMI. The good news is that the growth trajectory established in 2024 is likely to stay in 2025 and beyond.
Sales of semiconductor equipment are forecast to increase by 6.5% in 2024 to $113 billion. More importantly, semiconductor equipment spending is expected to jump to a new record of $121 billion in 2025, followed by a much stronger jump in 2026 to $139 billion. As such, now would be a good time to take a closer look at one name that could benefit from this market’s growth — ASML Holding (ASML -0.18%).
ASML stock disappointed investors in 2024, with its shares down 5% as of this writing. These returns are in stark comparison to the nearly 24% gains clocked by the PHLX Semiconductor Sector index this year. However, signs are pointing to a turnaround in ASML’s fortunes next year.
Let’s look at the reasons why.
ASML’s financial performance could exceed expectations next year
ASML is a Dutch semiconductor equipment company that’s known for manufacturing advanced chipmaking equipment that plays a critical role for chipmakers and foundries that make chips for diverse products ranging from smartphones to computers to data center servers. Specifically, ASML holds a monopoly-like position in extreme ultraviolet (EUV) lithography machines, which are considered to be the most advanced type of chipmaking equipment.
EUV lithography machines enable chipmakers to produce chips at a large scale based on advanced process nodes such as 7-nanometer (nm), 5nm, and 3nm. The demand for these chips has been robust. Apple, for instance, is using the 3m process to manufacture its smartphone processors. Nvidia and Advanced Micro Devices have been using the 5nm process to manufacture artificial intelligence (AI) chips, and they are expected to move to a 3nm process node in the future.
All this bodes well for ASML, which struggled in 2024 because of poor demand for semiconductors in 2023 which led its customers to pull back on expansion. ASML expects to end 2024 with sales of 28 billion euros, which would be a slight improvement over last year’s sales of 27.6 billion euros.
In 2025, ASML expects its top line to increase to a range of 30 billion euros to 35 billion euros, which would be a 16% increase at the midpoint. The good news is that ASML is in a position to exceed its guidance, considering that it was sitting on an order backlog worth 36 billion euros at the end of the third quarter of 2024.
More importantly, ASML continue to receive orders in 2024 despite the tight spending by its customers on manufacturing equipment. It has received bookings worth 11.8 billion euros in the first nine months of 2024, which is slightly higher than the 10.8 billion euros worth of bookings that it received in the same period last year.
As spending on semiconductor equipment rises next year, there is a good chance that ASML’s order book could continue getting bigger, and it could fulfill more orders as demand picks up. Investors should note that 17 new semiconductor fabrication plants are expected to go online next year, leading to record capacity addition that would be nearly double the semiconductor capacity that’s coming online this year.
An acceleration in earnings growth and an attractive valuation make this stock a solid buy
Analysts expect ASML’s earnings to increase by 22% in 2025, followed by a stronger jump in 2026.
Data by YCharts.
That’s why investors looking to take advantage of the growth in semiconductor equipment spending in 2025 and beyond would do well to take a closer look at ASML stock, especially because it is trading at an attractive 29 times forward earnings, which is only a bit ahead of the Nasdaq-100 index’s forward earnings multiple of 27.4 (using the index as a proxy for tech stocks).
Assuming ASML indeed achieves earnings of $31 per share in 2026 and trades at 35 times earnings at that time, its stock price could hit $1,085. That would be a 53% jump from current levels, giving investors a solid reason to buy this semiconductor stock as it could step on the gas over the next couple of years.
Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML, Advanced Micro Devices, Apple, and Nvidia. The Motley Fool has a disclosure policy.
