When a company: Nvidia (Nasdaq: NVDA) As the popularity of artificial intelligence (AI) stocks increases, soaring stock prices make it difficult to invest in the company. When that happens, it’s best to look a few levels down the supply chain and consider other winners.
Hardware companies like Nvidia rely on multiple suppliers to bring best-in-class products to market. One of the key players in the supply chain is ASML (ASML -0.37%): The company’s extreme ultraviolet (EUV) lithography systems are needed to produce some of the world’s most transistor-dense and powerful chips, such as those powering Nvidia GPUs designed for training AI models.
So should you invest in ASML?
ASML has a product like no other
ASML has obtained exclusive rights to the EUV system. No other company can build a machine that replicates the behavior of their own machine (although Huawei has applied for a patent for a similar process). As such, ASML has no competitors.
What’s more, the machine took years to build and was about the size of a school bus. And in a market with strong demand for high-end chips, the company’s lithography systems sell more or less.
However, the Dutch government places certain restrictions on where ASML can sell its products.
ASML is based in the Netherlands and is subject to other guidelines. Still, the country’s goals are largely in line with those of the United States and the EU, and aim to prevent certain countries, most notably China, from buying this cutting-edge technology. Sales of EUV systems (the most powerful kind) have been restricted since 2019. In addition, the Dutch government has begun restricting sales of ASML’s deep ultraviolet (DUV) equipment, which is used to make less powerful but still important chips.
ASML is currently required to apply for an export license for its DUV lithography equipment to prevent its DUV lithography equipment from being exported to China. Luckily for investors, ASML does not expect these restrictions to have a material impact on its business this year or in the near future.
So even if ASML fails to sell to important segments of the global market, it can still be a strong business.
But how good is ASML’s financials?
Expensive stocks with high ratings
ASML’s first quarter revenue was 6.75 billion, up 91% year over year. The strong momentum is expected to continue, with sales expected to grow 24% in the second quarter.
Notably, ASML sold only 100 lithography systems in the first quarter to generate €6.75 billion. This reflects how valuable ASML’s products are.
ASML is also very profitable, with a 29% net profit margin among the top hardware companies. This profit margin has generated a large amount of cash for his ASML, which he has used to reward shareholders by repurchasing shares (about 2% of shares outstanding last year) and paying dividends. However, at the current share price, the dividend yield is just 0.8%.
ASML PE ratio data from YCharts.
When it comes to valuation, ASML has never been and will never be a cheap stock.
It has a premium rating because it locks onto the EUV market. However, current and future price/earnings ratios are above what the company has traded in the past. Part of this premium is due to growing interest in AI technology as the chipmaker will need more ASML machines to meet his demand for AI-driven processing power.
So is ASML a good stock to buy now? I think so. Dominance in key markets puts the company in an enviable position. Stocks may be expensive, but investors often have to pay a premium to own a best-in-class business, which is ASML. This may not be a stock to invest in outright, but it’s a great growth stock that can balance the booming but less profitable businesses in your portfolio.
Keithen Drury has no positions in any of the mentioned instruments. The Motley Fool has positions with and endorses ASML and Nvidia. The Motley Fool has a disclosure policy.
