The tech sector has been getting hammered so far this year, down 10.5% at the time of this writing, which is slightly worse than the Nasdaq Composite. The Nasdaq is in a correction -- down over 13% from its all-time high at the time of this writing. Semiconductor stocks like Nvidia and Broadcom are down even further.
ASML(NASDAQ: ASML), which makes the world's most advanced extreme ultraviolet (EUV) lithography machines, is getting dragged down with the broader sell-off even though the company's long-term future is brighter than ever.
Here's why ASML is one of the most straightforward ways to invest in artificial intelligence (AI) and why the dividend stock is a high-conviction buy during the broader market sell-off.
Image source: Getty Images.
Powering semiconductor innovation
ASML's latest EUV machines cost hundreds of millions of dollars and weigh more than most commercial airplanes. These giant machines are integral in chip manufacturing. Without them, semiconductor fabrication plants operated by Taiwan Semiconductor Manufacturing and Intel would have a difficult time making cutting-edge chips designed by companies like Nvidia.
Unlike other aspects of global manufacturing, which is often commoditized and highly competitive, ASML is in a league of its own. It is so far ahead of the competition that it effectively has a monopoly.
ASML has steadily grown sales and earnings thanks to increasing global chip demand. Its business model gives it immense pricing power. Despite its numerous advantages, ASML isn't immune from challenges.
Risks worth noting
The semiconductor industry is cyclical, which can have ripple effects on ASML's business. If ASML's customers receive fewer orders, they could pull back and delay spending.
However, many of today's top chip designers generate plenty of cash flow to invest through the cycle. Nvidia and Broadcom, for example, are seeing explosive demand for their AI chips from hyperscalers like Amazon, Microsoft, Alphabet, Apple, and Meta Platforms. Even if there's a pullback in capital expenditures from hyperscalers, it's not very likely a company like Nvidia will pause innovation. Rather, it would make more sense to use industry weakness as an opportunity to increase its lead over the competition.
Similarly, there are few reasons why ASML should pause its research and development. Rather, it would make more sense to continue pushing the bounds of technology advancement so that when the next cyclical growth period occurs, ASML is ready to capitalize.
Tariffs and geopolitical tensions are another threat to ASML's business. Tariffs could lead to higher input and manufacturing costs. But again, ASML is well-positioned to pass along those costs to its customers.
The biggest risk to ASML is trade restrictions. The Dutch company's exports are subject to trade terms, which can change dramatically in today's economic climate. China buys a ton of chips but faces strict restrictions. China may develop alternatives to EUV technology to be less reliant on imports, which would impact ASML.
In its fourth-quarter 2024 results from January, ASML forecasted China orders to return to a more normalized percentage of sales after spiking in 2023 and 2024.
All told, ASML's near-term growth is vulnerable to trade tensions and a cyclical slowdown. Even so, its guidance for first quarter fiscal 2025 net sales is 7.5 billion euros to 8 billion euros with a gross margin between 52% and 53% compared to 5.3 billion euros in net sales and a 51% gross margin for first-quarter fiscal 2024. So at least for now, ASML's backlog is strong enough to maintain solid growth. But full-year results could swing wildly based on demand and trade tensions.
A high-quality company at a fair price
ASML, and semiconductor stocks in general, can be difficult to value because of the industry's cyclical nature. If growth keeps up, ASML can look dirt cheap in the near term. But if there's a multiyear slowdown, investors may be less willing to pay a premium price for a chip stock.
ASML's price-to-earnings (P/E) ratio is 33.4 and its forward P/E is 27.9. These are bargain levels for ASML given its 10-year median P/E is 35.1. However, investors should be cautious when looking at a chip stock's forward valuation metrics, especially now.
Suppose trade tensions lead ASML's business to stagnate this year, and the company doesn't grow its earnings at all. In that case, the stock would look more expensive because its forward P/E would come down. Even with that glass-half-empty mindset, ASML is still a good value because AI presents such a compelling long-term growth opportunity.
ASML should sport a valuation higher than its historical average, not lower, even if sales languish in the near term. Long-term investors would surely trade a year or two of little to no growth for a decade of strong results. But the reason ASML's valuation is so cheap is because the stock began selling off in the summer of 2024. In fact, it is down 30% in the past year. So while many chip stocks were hovering around all-time highs toward the end of last year, ASML was already beaten down.
In addition to the inexpensive valuation, ASML pays a dividend, which adds an incentive to hold the stock through periods of volatility. The dividend payment can vary because ASML bases the payout on the performance of the business (and because the dividend is subject to foreign exchange conversions). But still, the dividend is a core aspect of ASML's capital return program, which separates ASML from other tech stocks that don't pay dividends. As for now, ASML's dividend yield based on its trailing payout is 1.1% -- which is respectable, given the S&P 500 yields just 1.3%.
ASML is built to last
ASML is a no-brainer buy because of its wide moat and ability to endure a downturn. The company is well-positioned to play an integral role in supporting AI chip advancements, regardless of changes to hyperscaler market share.
The stock's reasonable valuation and dividend make it a good buy for investors looking to avoid high-flying alternatives.
Add it all up, and ASML stock stands out as a compelling buy-and-hold candidate for investors who are focused on where their portfolio will be three to five years from now than the day-to-day market noise.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Daniel Foelber has positions in ASML. The Motley Fool has positions in and recommends ASML, Alphabet, Amazon, Apple, Intel, Meta Platforms, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft, and short May 2025 $30 calls on Intel. The Motley Fool has a disclosure policy.
