ASML reaches inflection point with 100% upside in sight

ASML Holding N.V. ASML did not give the guidance that suggests its share price could rise 100% unless you consider the guidance cautious.

In that case, the guidance for flat revenue in 2024 catalyzes the market and is a force that has yet to play out. Because ASML business is supported by demand, onshoring semiconductor manufacturing and increasing global capacity, the company will likely outperform this year's forecast, and growth will persist.

ASML has a solid quarter: Analysts upgrade on the outlook

ASML had a solid quarter, with revenue and earnings up 12.5% and 12.7% year-over-year (YoY), ahead of the consensus figures.

The strength was due primarily to sales of new systems, which surged 20% compared to flat sales for used equipment, giving evidence of demand for next-gen technology. ASML's offerings include the dual-stage extreme ultraviolet lithography system, which can make the most advanced chips.

The net bookings are the news that got the market's attention and suggests the guidance is cautious. Net bookings surged sequentially and compared to last year, surpassing expectations. The sequential gain is near 250%, the YoY about 45%, with strength expected in 2024 by the market, if not by ASML execs. Not only will the world's foundries need to advance their technology, but expand their capacity to meet the demand for AI-friendly semiconductors.

Analysts' activity has been solid following the release. MarketBeat.com is tracking a handful of fresh reports, including one upgrade to "outperform" by Sanford Bernstein, initiated coverage by Cantor Fitzgerald and a new high price target set by Raymond James. Raymond James raised its target 17.6% to $1,000 or 15% above the current price action, the second price target increase in as many weeks.

Valuation is not a concern for ASML

ASML stock is trading at a high 40x valuation following its post-earnings pop. That may provide a hurdle in the near term, but it is pricing in significant growth. The valuation falls to a more respectable 28x in 2025 when execs expect to see its growth efforts and the world's shift to supercharge results.

The capital returns help with the valuation and outlook for share price gain. The dividend isn't large and varies from quarter to quarter, but it grows annually and is safe. The company is a committed payer with a low payout ratio, so annual increases can continue without earnings growth, and the growth outlook is substantial, flat to up in 2024 and roughly 50% in 2025. Future increases may also be significant.

Excess FCF is used for repurchases, which have also ramped higher over the past few years. Repurchases have the company share count down more than 7.25% since 2028 and are expected to continue in 2024.

This is how ASML advances by 100%

ASML has secular trends, earnings growth, cash flow, dividends and share repurchases to support its stock price advance, but the path to a 100% gain is technical. The company is trading within a range and may break out of it soon, bringing several technical targets into play. One of those targets is the range magnitude in dollars, which is $400 to $885 or $485; the other is the percentage gain, which is 120%.

As wild as that sounds, there are precedents. Not only did NVIDIA NVDA surge more than 100% after breaking its 2022/2023 trading range, but so did KLA Corporation KLAC, a peer more closely aligned with semiconductor manufacturing.

KLA Corporation stock broke out of its trading range in mid-2023, has outstripped its highest targets and is well on the way to doubling. The risk is that it has yet to report for Q4, and the market is well above the analysts' range, putting it in danger of profit-taking and correction.