The Nasdaq-100 Technology Sector index is down about 15% so far this year thanks to rising pessimism surrounding tech stocks related to factors like high inflation, a hawkish Federal Reserve that’s raising interest rates, Russia’s invasion of Ukraine, and the possibility of a recession.
However, the tech stock sell-off has been widespread and fairly indiscriminate, creating an opportunity for savvy investors to buy top Nasdaq stocks — such as ASML Holding ( ASML 1.91% ) — at enticing valuations. The company is set to release its earnings report on Wednesday, April 20. Let’s look closely at what’s expected of ASML in this latest report and why it should be on investors’ radar right now.
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ASML is set up for solid growth this year and beyond
ASML Holding stock has lost about 23.8% of its value so far in 2022. The decline has brought the stock’s price-to-earnings ratio down to 38.5. While that’s still expensive when compared with the Nasdaq-100’s earnings multiple of 32, ASML’s current multiple represents a significant discount to its P/E ratio of 53 last year. What’s more, its stock is now trading at a slight discount to its five-year average P/E ratio of 40.
So, now looks like a good time for investors to consider ASML stock for their portfolios. That’s because the company has gained impressively from the global chip shortage by supplying fabrication equipment to foundries over the past couple of years — a catalyst that won’t be going away anytime soon.
ASML has guided for first-quarter sales of 3.4 billion euros ($3.66 billion) at the midpoint of its guidance range. While that’s lower than the year-ago sales of 4.4 billion euros, investors shouldn’t be alarmed as the Q1 guidance reflects a change in ASML’s revenue recognition. Under its fast shipment policy, ASML is shipping its machines to customers before the completion of final testing “in support of customers’ desire to bring systems into production as quickly as possible.”
It is recognizing revenue from these sales only when final testing and acceptance of the equipment happens at the customer’s site. ASML points out that the total value of its shipments in the first quarter would range between 5.3 billion and 5.5 billion euros, which would have translated into a 23% increase in revenue over the prior year.
The company’s full-year guidance calls for a 20% increase in revenue, excluding the machines sold under its fast shipment policy. The company’s top line would have increased 25% in 2022 including the value of the machines that will be shipped in the fourth quarter, but the revenue will be recognized in the first quarter of 2023.
ASML’s 2022 guidance indicates that it could finish the year with around 22.3 billion euros in revenue compared with last year’s top line of 18.6 billion euros. So, the company is firmly on track to achieve its long-term annual revenue target of 24 billion euros to 30 billion euros by 2025. But it won’t be surprising to see ASML exceed the higher end of that target in the next three years as the demand for the extreme ultraviolet lithography (EUV) machines that it sells is expected to increase at an annual rate of 25% through 2026.
The big picture is bright
ASML is the only supplier of EUV machines that are used for manufacturing advanced, more powerful chips, which puts it in a solid position to tap this fast-growing opportunity. Not surprisingly, analysts expect ASML’s earnings to grow at an annual rate of nearly 30% for the next five years, up from the 18% annual growth it has clocked in the past five.
Therefore, investors looking to buy a top tech stock this earnings season should have ASML on their watch lists. The stock is relatively cheap right now versus historical averages, and any weakness in the stock price following the earnings report would make ASML even more attractive. On the other hand, a stronger-than-expected report could inject life into the stock and bring some relief to investors after a torrid time so far this year.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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