ASML Holding’s (ASML Quick QuoteASML - Free Report) shares have rallied 42.4% in the past year, outperforming the Zacks Semiconductor Equipment-Wafer Fabrication industry’s return of 41.2% and the S&P 500 index’s gain of 33.5%. 

ASML has been benefiting from its growing investments in advanced technologies, expanding its footprint in the memory market and increasing design wins. Its strong positioning in the semiconductor industry, which has been staging a solid rebound on the growing demand for artificial intelligence (AI), is a major positive. Improving wafer fab equipment spending is also acting as a tailwind for the company.

One-Year Price Chart

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However, market uncertainties, persistent inflation, geo-political tensions and the rising cost of technological innovations have been concerning for the company.

Increased pricing pressure due to rising competition from major industry players like Lam Research (LRCX Quick QuoteLRCX - Free Report) and Applied Materials (AMAT Quick QuoteAMAT - Free Report) is an added risk for ASML. 

Against this backdrop, the question that arises is whether ASML’s technology advancements will continue to drive momentum in its share price amid macroeconomic headwinds. Let’s delve deeper into the fundamentals of the company.

Technology Drive Boosts ASML’s Prospects

ASML Holdings’ growing investments in technology innovation are driving its prospects in the semiconductor industry.

The company’s investments in Extreme Ultraviolet (EUV) infrastructure are noteworthy. The service business of ASML is performing well, fueled by the increasing contribution of EUV services.

ASML is improving lithography tool utilization levels at both logic and memory customers to address the growing memory demand. ASML expects growth in memory revenues for 2024 from that reported in 2023 on the back of DRAM technology node transitions, which are required to support advanced memories.

Growing momentum in low numerical aperture (NA) and high NA machines is benefiting the company’s Installed Base business. The rising uptake of the NXE:3800 low NA machine, which can deliver robust performance with a productivity of 220 wafers per hour, is driving growth in ASML’s EUV sales.

NXE:3800 also comes with imaging and overlay improvements, which make it ideal for memory and logic-advanced nodes.

ASML Holding has orders from a number of new fabs being constructed across the world. Management expects a better second half of 2024 and a cyclical upturn for 2025. ASML’s growing efforts to add and improve capacity to meet current and future customer demand with the support of its supply-chain partners are other positives.

With the abovementioned endeavors, the company remains well-poised to capitalize on the increasing memory demand, owing to the DRAM technology node transitions.

Moreover, ASML is witnessing growing demand for its products, thanks to the increasing adoption of advanced nodes for supporting the build-up of the digital infrastructure, including growth drivers such as 5G, AI and high-performance computing solutions.

Headwinds Surrounding ASML’s Prospects

Escalating tensions between the United States and China have been detrimental to the semiconductor industry’s prospects. Tightening U.S. restrictions on high-tech exports to China, particularly advanced AI chips, have been a negative.

As the United States tightens restrictions on China, Beijing has intensified its push for self-sufficiency in critical industries. The recent directive to phase out foreign chips from key telecom networks by 2027 underscores Beijing's accelerating efforts to reduce the reliance on Western technology.

These trade restrictions do not bode well for ASML’s prospects.

Also, growing concerns over the Federal Reserve's interest rate policies and fears of a looming U.S. recession are other negatives.

Apart from these macro headwinds, ASML Holding’s mounting expenses associated with capacity rampup and technological innovation are expected to keep its margin under pressure. It expects a lower gross margin for 2024 than that reported in 2023 due to increasing high NA costs. 

Weakening momentum in logic does not bode well for ASML. The company expects lower logic revenues this year than that reported last year.

Due to all these factors, ASML expects sluggish top-line growth. The Zacks Consensus Estimate for 2024 revenues is pegged at $30.18 billion, indicating year-over-year growth of 1.25%.

The consensus mark for 2024 earnings stands at $20.38 per share, suggesting a year-over-year decline of 5.3%.

ASML Trades Below 50-Day Moving Average

Adding to investors’ concerns, ASML shares have dipped below their 50-day moving average, a technical indicator often seen as a bearish signal. This movement suggests the continuation of the downward trend, at least in the short term.

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ASML Stock is Overvalued

ASML Holding is trading at a forward 12-month Price/Earnings multiple of 27.4X, an 13.9% premium to the industry’s average of 24.05X. A stretched valuation indicates that investors should wait for a better entry point.

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Conclusion

ASML Holding’s strong portfolio and technology innovation drive are positives for its long-term prospects. ASML shares are expected to continue this upward trajectory, driven by these factors.

However, its stretched valuation, weak expectations for revenue growth, stiff competition, macro uncertainties and geo-political tensions between the U.S. and China are dampening its near-term prospects.

ASML currently carries a Zacks Rank #3 (Hold), suggesting that it may be wise to wait for a more favorable entry point in the stock. However, investors who already own the stock might expect the company’s growth prospects to be rewarding over a longer term. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.