The semiconductor industry has become a focus of every investor portfolio in the past few months, as technology stocks have outperformed almost every other sector in the past 12 months. Led by names like Nvidia Co. (NASDAQ: NVDA), the semiconductor rally has another set of lungs, one that has yet to gain the recognition it deserves.
Fears that Nvidia stock may now be overextended are rising, crystalizing a 14% retracement from its all-time high price of $974 a share; it looks like Nvidia needs a breather before potentially returning to its bullish uptrend. Other investors see the potential opportunity in buying Taiwan Semiconductor Manufacturing Co. (NYSE: TSM). Yet, geopolitical risks keep the stock from receiving the valuation it deserves.
A third, perhaps underrated name, is in ASML Holding (NASDAQ: ASML). While not a direct semiconductor manufacturing player, it is the company that essentially every chipmaker relies on, as it makes the necessary lithography equipment to make these chips.
It’s All About Risk and Reward
While investing in Taiwan Semiconductor may seem a little riskier, especially now that China is threatening to invade Taiwan and compromise the company’s operations, ASML provides investors with a somewhat safe haven.
These two names are co-dependent, meaning that TSMC relies on ASML to provide it with equipment to produce some of the world’s latest lithography technology. This enables TSMC to keep up with its less-than-10 nanometer chip designs.
Because of this relationship, ASML is directly linked to Nvidia’s success and even the success of other more established brands like Intel Co. (NASDAQ: INTC).
In fact, Intel is one of ASML’s biggest customers, second only to TSMC. For TSMC, its biggest customers are none other than Nvidia and Apple Inc. (NASDAQ: AAPL); investors can connect the role ASML plays in the global supply chain this way.
ASML shareholders are exposed to the upside in the semiconductor industry without worrying about all of these geopolitical risks, especially now that TSMC received an $11 billion grant from the U.S. government in an attempt to onshore semiconductor manufacturing.
Despite these efforts, it will likely take a couple of years before these factories are built and operational, so bringing TSMC’s production capacity to the U.S. won’t be an overnight job. Because of this, the international risk still stands, but not for ASML.
The Gap is Clear For ASML
Two things typically drive stock prices: earnings per share (EPS) growth and how markets value these future potential earnings today. For ASML, Wall Street analysts believe that the upcoming quarterly earnings announcement may catalyze the stock to new highs.
Expecting to see EPS growth of 42% this year emphasizes this first-quarter announcement, especially since the overall semiconductor industry is looking to grow its earnings at an average rate of 26%.
This growth compares to Nvidia’s projected 13% EPS growth in the next 12 months, which is less than half of ASML’s. Not even Taiwan Semiconductor, Nvidia’s leading supplier, stands close to ASML in its 24% projection.
On a valuation basis, the forward P/E ratio comes in handy (as it attempts to value tomorrow’s earnings today), making ASML an exciting proposition. Valued at 31.3x forward P/E, ASML is close to Nvidia’s 32.4x valuation.
If investors could get more than twice the growth at relatively the same price, why would they choose Nvidia stock over ASML? Those who stick with Nvidia simply rely on momentum and market popularity.
Another interesting angle is found in Intel. Analysts boldly bet that its EPS could grow by 115% this year. Yet, markets value these potential future earnings at 17.3x, almost half Nvidia and ASML. The saying “it must be cheap for a reason” applies here.
Considering that TSMC, not Intel, received the bulk of funding in the CHIPS and Science Act, markets may not be too confident that Intel will achieve this growth. However, if markets are wrong and Intel does beat, it is ASML who will deliver all the upside without any uncertainty since Intel cannot succeed without ASML.
Wall Street’s Vote for ASML
Analysts at Wells Fargo & Co. (NYSE: WFC) boosted their price targets on ASML up to $1,150 a share, calling for a 20% upside from today’s prices. Meanwhile, Nvidia’s consensus price target of $926.3 only gives it 5% to move higher from today.
Markets aren’t the only ones buying ASML’s growth story and bidding up the stock. Over the past quarter, The PNC Financial Services Group Inc. (NYSE: PNC) increased its position in the stock by 4%, bringing its total stake to $24.8 million.
Fisher Asset Management, known for its macro value strategies, boosted its position by 2%, totaling a $3.4 billion investment in ASML stock.
Last but not least, bears have no intention of stopping the rally, as short interest in ASML stock declined for two consecutive months, bringing its net short dollar amount to levels not seen since April 2023, when the stock reached a high for that year.
