Which company is The Motley Fool spotlighting as a potential standout in the AI supercycle?
As I watch today’s market swings unfold, I’m keeping myself from making impulsive moves. Instead, I decided to dissect a new Motley Fool’s Stock Advisor advertisement .
This latest promo teases an Specialized AI report called “Premium AI report” using Apple as the main hook to draw investors in. It also alludes to Apple’s so-called “AI Hidden Advantage”.
It’s not hard to see why many expect Apple to eventually thrive in AI. The company has a history of taking existing technologies and redefining them into must-have products that reshape consumer behavior. However, this strategy hasn’t been flawless—take the lukewarm response to Apple’s Vision Pro as an example. Still, a slow beginning doesn’t determine Apple’s future. Many remain confident that once Apple fully understands consumer AI needs, it will take the lead, just as it did with the iPhone and iPad. Even Berkshire Hathaway’s unexpected decision to sell half its Apple stake, along with the delay of “Apple Intelligence” capabilities in the upcoming iOS update, are seen by some as minor hurdles rather than long-term roadblocks. Given its track record, Apple making waves in AI seems inevitable.
But what exactly is the so-called Trojan Horse? Apple could be rolling out AI capabilities quietly, embedding them into its ecosystem in a way that enhances user experience without the fanfare seen from Google, Microsoft, OpenAI. The Motley Fool’s real message? A lesser-known company might actually be the biggest AI winner—one that, much like the mythical warriors concealed within the Trojan Horse, is poised to emerge when least expected.
And the last hint:
So, which stock is being hinted at? I believe Motley Fool once again pointing to ASML, the Netherlands-based semiconductor equipment leader. ASML holds a near-monopoly on advanced extreme ultraviolet (EUV) lithography machines, which are essential for producing cutting-edge semiconductors.
Give them credit—The Motley Fool was already calling ASML the “most influential company globally.” as early as October 2022, when market sentiment was much bleaker. That turned out to be a solid prediction—my only regret is getting too fixated on timing the bottom and missing my chance to buy. Back then, ASML briefly dipped to around $400, and since then, it has nearly doubled. Over the past three years, the stock has taken a wild ride, dropping from $800 to $400, then climbing to $1100, now settling around $800 again.
When analyzing semiconductor equipment companies like ASML, three key narratives tend to emerge:
- The Cyclical Nature of the Industry – The semiconductor market is infamous for its boom-and-bust cycles. Demand swings from chip shortages to oversupply, triggering waves of financial commitment followed by downturns when production outpaces demand. We saw an extreme version of this during COVID-19, and now we’re amid an AI-fueled semiconductor boom. While this has driven strong demand for high-end AI chips, it hasn’t necessarily translated to a broader increase in sales for bon-AI user. and industrial semiconductor products.
- China’s Expanding Role – China is the world’s largest consumer of semiconductors and one of the most ambitious players in expanding domestic chip production. However, U.S. restrictions and rising geopolitical tensions have started to weigh on Western chipmakers and equipment suppliers. Companies like ASML are caught in the middle, as the Dutch government faces pressure from the U.S. to limit sales of AI-enabling technology to China while trying to protect one of its most strategically important firms.
A third perspective suggests that chip equipment firms could experience sustained growth as global semiconductor production diversifies. Many nations are working to shift manufacturing away from Taiwan, China, investing in new fabrication facilities across the U.S., Japan, and Europe. While this transition is promising for equipment manufacturers, the financial impact may not be immediately visible in quarterly earnings. The sale of manufacturing tools is crucial, but long-term service and maintenance contracts for these machines provide a steady revenue stream, making customer relationships in China, Taiwan still strategically important.
Since constructing a large semiconductor facility can take up to five years, these investment cycles don’t always align neatly with broader economic trends. Delays are common, as evidenced by multiple major manufacturing initiatives in the U.S. Companies spearheading these initiatives face their own hurdles—Intel, for example, is grappling with significant setbacks. Its stock has plunged 60% this year, raising concerns about its ability to execute on large-scale manufacturing expansions.
Predicting geopolitical risks—such as a potential trade embargo on Taiwan or an outright military conflict—is nearly impossible. However, semiconductor firms are likely more preoccupied with immediate challenges. The key question they must address is whether they’ve overproduced amid shifting demand trends and economic uncertainty. This cycle could deviate from past patterns, given the pressing need to establish manufacturing hubs outside China. While this restructuring supports long-term stability over the next ten years, short-term disruptions in the next couple of years are highly possible.
So, where does ASML stand financially? The company is still forecasting robust revenue and profit growth, even though earnings in 2024 may dip from the record highs of 2023. This kind of fluctuation is not unusual—ASML saw earnings declines 2021-2022, and 2018-2019. As an industry leader, ASML generates much of its revenue from the sale of a relatively a limited quantity of highly complex lithography machines, making annual financial performance somewhat volatile.
ASML’s present valuation is far from cheap. The stock is priced at over 100 times its avaiable cash flow— a sharp contrast to the 16x multiple it saw at the end of 2022. Its price-to-earnings ratio hovers around 40, significantly higher than the 19x it commanded pre-COVID or even the 25x seen just 2 years ago. Like in late 2022, the company is navigating a slowdown, but expectations for future growth are far more optimistic. Between 2021 and 2023, earnings expanded at an annual pace of 10-12%, but starting in 2025, analysts anticipate growth exceeding 20% per year as demand rebounds.
So, how much are you willing to pay for ASML? Are you investing in a company that just endured a sluggish phase, or are you betting on a major comeback? The answer largely depends on whether the semiconductor industry ramps up capacity fast enough to fulfill the rising demand from AI-driven applications like NVIDIA’s chips. It also hinges on whether the planned semiconductor manufacturing facilities in the U.S. and Europe can stay on schedule.
Compared to other heavyweights in semiconductor equipment, ASML generally carries a richer valuation. Back in late 2022, peers like Lam Research, Applied Materials, and KLA were trading at just 10x earnings, while ASML sat at 22x. Fast forward to today, those companies have P/E multiples ranging from 20 to 35, whereas ASML is trading at 44 times trailing earnings.
What justifies this premium? Growth. In the last five years, ASML’s revenue surged at a 30% annual rate, far outpacing 15-20% growth of its competitors. While companies like AMAT and LRCX expected to see growth slow before AI boom reignited demand, they are now projected to expand earnings by 12-17% annually. ASML, on the other hand, is forecasted to maintain growth over 20% annually for the upcoming 5 years. These estimates may not be perfect—forecasting is always tricky—but they provide a clear rationale for ASML’s elevated valuation.
Despite its dominant position in lithography, ASML’s lofty valuation hasn’t always translated into superior returns. Historically, investors who opted for its closest competitors often walked away with better gains, even when buying ASML at attractive dips—like the one in October 2022. While its competitors lack ASML’s monopoly status, they tend to move in tandem with the broader semiconductor cycle, experience similar pullbacks, and present lower volatility due to their more modest valuations.
Overall, this remains one of the strongest-performing sectors. In the last five to ten years., all four companies have trounced the S&P 500. However, their performance in the last two to three years has been more muted.
It’s easy to be enamored with ASML’s monopoly. Its impressive gross margins hint at strong pricing power, at the same time, its operating costs are far higher than those of its peers—thanks in part to its massive R&D investments. Another consideration is its reliance on a small number of key customers, such as Taiwan Semiconductor (TSMC), for the bulk of its bookings. ASML’s business model is also more collaborative than purely extractive, as it has historically received financial support from key clients to develop its cutting-edge technology. This raises an important question: is ASML truly maximizing profits from its market position?
At the end of the day, ASML remains a favorite among investors, and that enthusiasm is reflected in its premium valuation. But does paying up for this dominance actually lead to better returns? So far, the answer hasn’t been a clear yes. The fundamentals suggest that ASML is remains expensive, despite its leadership in chipmaking technology.
If you’re looking to go deeper into ASML’s business, I highly recommend checking out Business Breakdowns show on ASML. It is from around a year ago, but the insights remain relevant.
So, where do you stand? Does ASML’s resilience amid recent market turbulence make it a buy? Is it still overpriced? Or are you caught in the middle?? Drop your thoughts in the comments below!
