Netherlands-based ASML Holdings (NASDAQ:ASML) was one of the best-performing stocks on the Nasdaq 100 exchange in the first quarter of 2024. As artificial intelligence mania gripped the market and chip companies invested billions into the technology, ASML soared, rising 33% over the first three months of the year.
That’s because the semiconductor equipment manufacturer has a virtual monopoly on the manufacturing of the critical equipment chipmakers need to make AI chips. Its extreme ultraviolet lithography (EUV) machines are needed by the semiconductor industry for making pristine wafers.
Yet, the stock tumbled hard last month and is down 21% from its highs. The reason is nearly half of its revenue comes from China. With the Biden administration proposing harsh restrictions on sales of computer equipment to China, its business is most at risk of being severely damaged. Although it is domiciled in the Netherlands, if it wants to also sell its equipment to U.S. chip manufacturers, it will have to give up the China trade.
As difficult of a position as it places ASML Holdings stock, it also makes it the perfect time to buy shares.
Global Demand Is Surging
ASML is a picks-and-shovels play on artificial intelligence. It sells the tools to all the miners heading off to pan for AI gold. It doesn’t matter to it who wins as it is willing to sell to anyone who needs its equipment. Being an agnostic semi-stock is why ASML is a great investment.
Under normal circumstances, there would be no issues but because of heightened geopolitical concerns, ASML is at risk.
The computer equipment manufacturer’s total revenue rose 18% in the second quarter to 6.2 billion euros compared to a year ago. It achieved gross margins of 51.5%, better than what it reported for all of 2023.
Because ASML forecasts demand growing through 2025, this year is the first time it is pre-building its inventory in anticipation of the order flow. Meeting demand has been a problem in the past but hasn’t been a concern so far in 2024.
Its biggest market, though, is China. Sales to the country jumped 21% to 2.3 billion euros. While CFO Roger Dassen maintains ASML doesn’t look at country-specific markets to determine demand but rather looks at what global chip demand may be, it doesn’t model specifically for the country.
Yet with the Biden administration attempting to keep advanced semiconductor chips and equipment out of Beijing’s hands, it represents a potential sucking wound to ASML’s business.
A Narrow Escape
Fortunately, ASML was just given a pass. The Biden administration is keeping the export controls on countries like Taiwan, Singapore, Malaysia and Israel. Equipment manufacturers in Japan, South Korea and the Netherlands, however, would be exempt.
The restrictions bar about half a dozen Chinese semiconductor factories from receiving the vital equipment, Reuters reports. But not from the exempt countries, so it ultimately limits the effectiveness of the ban.
The administration maintains the exemptions are temporary though it doesn’t say when it will revisit them. ASML Holdings has gotten a reprieve but for how long remains to be seen.
Yet, it also means ASML stock should be high on your buy list.
Given Free Rein to Grow
While ASML does have a monopoly on certain equipment, not all of what it produces doesn’t face competition. Yet since the Biden administration is hamstringing U.S. equipment manufacturers, it leaves the door open for ASML and a handful of other companies to steal customers away from its rivals. Chipmaker Nvidia (NASDAQ:NVDA), for example, will be prevented from selling its AI chips to China.
Having free rein in the fast-growing Chinese semiconductor market should see ASML’s exports there surging in the quarters ahead. They were already on the rise but now they just might have had a match lit under their growth.
On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.
