Intel, Samsung, and even industry powerhouse TSMC rely on semiconductor manufacturing equipment made by ASML.
That ASML-made equipment -- and therefore its business -- is well protected by a sizable patent portfolio.
This technology outfit's business will ebb and flow in the near term, but it is still at the heart of the technology sector’s long-term self-fueling growth.
Are you ready to put some of your idle cash to work but aren't sure where? Maybe the market's usual favorites aren't so compelling right now.
If that's the case, there's nothing wrong with looking off the beaten path and stepping into a name that many investors may have never heard of -- like ASML(NASDAQ: ASML). There are four specific reasons some investors might want to make a point of diving into this specific stock sooner than later.
What is ASML?
ASML isn't a household name, but it's unlikely anyone living in your household doesn't regularly rely on the company's technology. This Dutch company designs and builds the complex equipment needed by the semiconductor manufacturing industry to cost-effectively make high-performance microchips at scale. Some of its biggest customers include Taiwan Semiconductor Manufacturing, Samsung, and Intel, for instance.
To be clear, there's more than one supplier to the semiconductor fab industry. ASML's particular and well-patented technology, however, is one of the most advanced and also happens to be pretty cool.
Image source: Getty Images.
It's called extreme ultraviolet (EUV) lithography. That's just a fancy term used to describe the use of intense light to "layer" a semiconductor into existence. Light is sprayed in a very specific pattern onto a piece of silicon, and the conductive material is then light-etched into the proper place at the proper thickness. That process is then repeated hundreds of times to create a single chip. The result? A tiny piece of powerful technology that fits inside your smartphone, computer, or other electronic device.
ASML is the only manufacturer using this technology (it holds the patent, after all) and industry analysts suggest ASML's share of this advanced sliver of the chip foundry business is north of 80%.
Four reasons to by ASML Holding
That's an impressive market share, for sure. But that alone doesn't necessarily mean ASML Holding stock is a buy. This company is still worth owning, though, for four other distinct reasons. They are:
1. The chipmaking industry needs ASML's tech
There's more than one way to make a microchip. There is only one way, however, to cost-effectively make high-performance ones by the millions without lithography machines -- specifically, ASML's EUV lithography machines.
This company holds roughly 20,000 active patents protecting its equipment designs. Although would-be rivals are regularly attempting to unlawfully use or gain access to its know-how, ASML does a great job at monitoring the market and enforcing its intellectual property rights.
Nearly one-fourth of the company's revenue comes from ongoing service agreements after the initial sales of equipment has been made.
2. The need for semiconductor chips is only going to grow
If you think demand for semiconductors is set to slow down now that everything already seems to be computerized, guess again.
Consumers' and corporations' warm embrace of technology has only scratched the surface of what future usage is likely to look like. Not only will AI-capable smartphones and computers create fresh demand for more and better microchips, things like home automation, remote-read utility meters, customer service interactions, warehouse and logistics work, and even some aspects of healthcare will eventually be powered by tech that requires high-performance chips.
To this end, Global Markets Insights believes the world's computer microchip market is set to grow at an average annualized pace of 10.7% through 2034.
3. The company is reliably (even if erratically) profitable
Steady, predictable profits are always nice. For some businesses like ASML's, though, it's just not possible.
Don't be dissuaded by this company's non-linear bottom-line growth. It's reliably earning at least some money each and every quarter -- enough to keep itself afloat even during leaner times without taking on debt. Therefore, it can thrive when there's more growth to be enjoyed.
Investors are reaping the immediate benefits of this persistence. While this stock's forward-looking dividend yield of 1% isn't thrilling, it's more real-time reward than you'll get from most other technology stocks.
ASML's cash flow is also more than enough to fund ongoing stock buybacks, including the 12 billion euros ($13.7 billion) repurchase effort underway right now. Since 2020, the $300 billion company has repurchased over $27 billion worth of its own stock, accounting for about two-thirds of its total cash return to shareholders during this period.
4. ASML stock is on sale
Finally, a big reason to buy ASML stock like there's no tomorrow is the simple fact that shares are arguably undervalued. They're still down 27% from last July's peak and currently trading near 2021's high.
That's what the analyst community is saying. Despite a prolonged period of subpar and choppy performance, analysts' current consensus price target of $857 is about 10% above this ticker's present price. A majority of these analysts also consider ASML stock a strong buy at this time.
ASML is not for everyone, but it is good for patient growth seekers
This stock has demonstrated some extreme volatility and a clear lack of net forward progress over the past four years, reflecting less-than-consistent revenue and earnings growth. Is this something that can simply be ignored? It depends.
If you've got no stomach for such volatility and aren't planning to hold for a minimum of five years, ASML Holding probably isn't for you.
While chipmakers always need foundry equipment, they don't always necessarily need new foundry equipment enough to pay a nine-figure price for just one of ASML's state-of-the-art lithography machines. And most semiconductor companies will need more than one of these production platforms. Time will eventually force new demand, but the chipmaking business's never-ending ebb and flow can make ASML's business a bit unpredictable in the near term.
If you've got time and tolerance for a bit of near-term weakness -- in exchange for above-average long-term gains -- ASML Holding may be one of the more reliable ways of plugging into the technology sector's ongoing growth. The high-end semiconductor industry can't thrive without its tech, but to remain competitive, the microchip industry's individual players will regularly need newer and better lithography machines. It's just a matter of when they're willing to make the upgrade.
Should you invest $1,000 in ASML right now?
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML, Intel, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: short August 2025 $24 calls on Intel. The Motley Fool has a disclosure policy.
