Semiconductor stocks have delivered so far in 2024 despite bouts of volatility recently, which is evident from the 26% gains clocked by the PHLX Semiconductor Sector index. However, the gains have been uneven as one of the most important semiconductor companies in the world underperformed the broader market.
Share prices of ASML Holding (NASDAQ: ASML) are up just 9% this year, receding after a bright start to the year. ASML stock is down 23% in the past three months over negative analyst sentiments over the impact of export restrictions on shipments to China, potential weakness in memory demand, and troubles at one of its key customers (Intel).
However, there are hints that things could start looking up when the company releases its third-quarter results on Oct. 16. Let's look at the reasons why.
ASML plays an important role in the global semiconductor industry. The company's extreme ultraviolet lithography (EUV) machines have been in hot demand from chipmakers so that they can make advanced chips based on small process nodes, capable of delivering fast computing performance while keeping power consumption low.
This explains why ASML had a sizable order backlog worth 39 billion euros at the end of the second quarter of 2024, driven by 5.6 billion euros' worth of new bookings during the quarter. More importantly, ASML's Q2 bookings increased by an impressive 54% on a sequential basis, while the number of new lithography systems sold during the quarter jumped to 89 from 66 in Q1.
A similar trend could unfold in Q3, thanks to the increase in capital expenditures by cloud service providers, chipmakers, and foundries. For instance, memory manufacturer Micron Technology spent $8.1 billion on capital expenditure last year. It expects capex in fiscal 2025 to be around mid-30% of its top line, which is expected to land at just over $38 billion. Based on that, Micron's capex could exceed $13 billion in the new fiscal year.
Similarly, Taiwan Semiconductor Manufacturing is expected to spend between $32 billion and $36 billion as capex in 2025 following this year's range of $30 billion to $32 billion.
The reason why these chipmakers are set to raise their capex is because major technology companies are set to spend more money on cloud infrastructure to meet artificial intelligence (AI)-related demand.
Market research firm Dell'Oro Group projects a 24% annual increase in data center capital expenditures through 2028, with the likes of Amazon, Meta Platforms, Alphabet's Google, and Microsoft expected to account for over half of the spending by 2026. A lot of this capex is set to go toward procuring advanced chips such as graphics processing units (GPUs) and accelerators meant for AI workloads, and ASML's EUV machines are the only ones capable of producing such chips.
That's because ASML has a monopoly in EUV lithography machines, which are used for making chips on process nodes that are 7-nanometer (nm) or smaller. Not surprisingly, ASML reportedly saw strong demand for its EUV lithography machines from TSMC, and the company projects robust demand for these machines going into 2026.
As such, there is a good chance that ASML's bookings for the third quarter could continue to increase and result in a stronger backlog.
ASML delivered 11.5 billion euros in revenue in the first six months of 2024. It expects 7 billion euros in revenue in the third quarter at the midpoint of its guidance range, which will bring its revenue for the first nine months of the year to 18.5 billion euros. Given that the company expects its full-year revenue for 2024 to remain in line with 2023 levels of 27.6 billion euros, it is likely to deliver a strong revenue guidance for Q4 of around 9.1 billion euros.
That would translate into a 26% jump from the year-ago period and would be higher than the 23% increase in revenue that analysts expect for Q4. So there is a possibility of ASML delivering better-than-expected results and guidance when it releases its results on Oct. 16, which could inject life into the stock and send it soaring once again. That's why savvy investors can consider buying shares of this semiconductor giant going into its Q3 report, as it seems set for a potential breakout.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML, Alphabet, Amazon, Meta Platforms, Microsoft, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft, and short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.
Should You Buy ASML Stock Before Oct. 16? was originally published by The Motley Fool