Costing only a thousand dollars at the moment, an outstanding Artificial Intelligence (AI) corporation's stock is currently discounted.

Costing only a thousand dollars at the moment, an outstanding Artificial Intelligence (AI) corporation's stock is currently discounted.

With the surge in popularity of AI-related stocks, many investors might feel they've missed their chance. However, one of the most significant players in the AI field just experienced a price drop.

ASML (ASML -0.71%) holds a technological edge that sets it apart from its competitors, resulting in a de facto monopoly. The company's machinery is essential for chip manufacturers to produce state-of-the-art chips that push the boundaries of computing power. Consequently, ASML is a vital cog in the chip industry's value chain, making it a critical AI player.

The recent dip in ASML's shares can be attributed to a less-than-impressive earnings report. Is this a redeemable opportunity for investors, or is there a valid reason for ASML's 40% price drop from its all-time high?

ASML's technology does not strictly adhere to the chip cycle

At $670 per share, ASML is not the cheapest stock on the market, but it is far from its all-time high of approximately $1,100. Given ASML's pivotal role in the chip industry, some investors might be surprised to find it not at its all-time high. Considering the increasing sales of graphics processing units (GPUs) by companies like Nvidia (NASDAQ: NVDA), which rely on chips produced using ASML machinery, this discrepancy might be puzzling.

However, it's essential to note that ASML is not entirely tied to the chip industry's business cycle. Orders for ASML's lithography machines are typically placed well in advance, implying that the capacity being built for AI chips has already been reflected in ASML's financial statements. Unfortunately, this has prompted management to revise its growth projections for 2025.

Previously, management had projected revenue of between 30 billion and 40 billion euros for 2025. However, this prediction has been trimmed down to a range of 30 to 35 billion euros – a downgrade that didn't sit well with the market, causing the stock to dip by 20% within a few trading days after the announcement.

The reduced revenue projections are largely due to China, which has become a significant market for ASML in recent years. In Q3, 47% of ASML's sales were to China, but management expects this percentage to drop to around 20% in 2025, returning to more historically normal levels. The reduction in business indicators that ASML might not be able to fully realize its potential in China might be caused by two factors.

Firstly, Western governments are wary of selling ASML's cutting-edge machinery to China or its allies, as this would allow them to manufacture the most advanced chips available. Various export restrictions imposed by the Dutch government (where ASML is based) and the US have already limited ASML's sales to China, and more stringent rules have been implemented recently.

Secondly, China is currently experiencing an economic downturn, which naturally dampens industrial expansion. Both factors are less favorable to ASML, but they represent temporary setbacks.

Notwithstanding the reduced revenue projections, management remains optimistic about the company's future.

ASML's future is bright

Although investors were less than impressed with ASML's revised 2025 revenue projections thanks to China's market size, long-term investors should pay attention to this statement from ASML's management:

In essence, the underlying trends remain extremely strong and extremely positive, indicating promising upside. However, the recent developments and customer-specific circumstances have resulted in a more gradual growth curve for our business.

Basically, ASML's financials might be growing at a slower pace than anticipated, but the long-term prospects are still promising. ASML is still expected to generate substantial revenue in 2025, with a projected range of 30 to 35 billion euros – a modest decrease from its previous projections but still well above current revenue. For 2024, management is projecting 28 billion euros in revenue, meaning the revised 2025 guidance represents 7.1% to 25% growth. If ASML's earnings come in at the lower end of the guidance, investor appetite may wane, but if they hit the top end, ASML could experience a sharp recovery.

Currently, the stock trades at 26 times its projected 2025 earnings.

Considering ASML's unmatched position and lack of competition, this multiple is not excessive.

While ASML's road may be challenging over the next year, the long-term outlook remains promising, making an investment in ASML a bet on the need for additional chip capacity to be developed in the coming years. ASML is likely to benefit significantly from this trend.

Given the revised 2025 revenue projections for ASML, some investors might question its investment potential. However, ASML's management remains optimistic about its future, stating that the underlying trends are extremely strong and positive, indicating promising upside. With ASML's technological edge and essential role in creating state-of-the-art chips, finance-savvy individuals might consider this dip as an opportune moment for investing in the company, as its shares may bounce back once earnings meet or surpass the projected range.

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