ASML Holding NV (ASML) Potential Upside From AI Surge After Its Consolidation Now!

In Jan 2024, ASML has cancelled shipments of hi-tech microchip machinery to China after pressure from the US government, it has been reported. ASML, a key firm in the global semiconductor manufacturing supply chain, was due to export three chip-making machines to China but had its export licences revoked by the Dutch government before they were shipped.

The AI surge seem to have positive impact on ASML as technical is giving it an uptrend signal, and it has enjoyed a pretty nice upside since its last earnings report on 24 Jan 2024 for period ending Dec 2023, giving us an EPS surprise of 10.11% beating estimate of 5.158 by 0.522.

Looking at potential opportunity to trade on a daily chart, we can see that buying strength have been rising consistently since its last earning report, but there is some decline.

But I would see this as an opportunity to start planning, as this might be a consolidation period before an upside.

I would like to bring us to the SWOT analysis on what are the strengths and weakness for ASML.

As one of the leading firms in its industry, ASML Holding N.V. has numerous strengths that help it to thrive in the market place. These strengths not only help it to protect the market share in existing markets but also help in penetrating new markets.

Here are some of the strength of ASML Holding N.V. :

Successful track record of developing new products – product innovation.

Strong dealer community – It has built a culture among distributor & dealers where the dealers not only promote company’s products but also invest in training the sales team to explain to the customer how he/she can extract the maximum benefits out of the products.

High level of customer satisfaction – the company with its dedicated customer relationship management department has able to achieve a high level of customer satisfaction among present customers and good brand equity among the potential customers.

Highly successful at Go To Market strategies for its products.

Weakness are the areas where ASML Holding N.V. can improve upon. Strategy is about making choices and weakness are the areas where a firm can improve using SWOT analysis and build on its competitive advantage and strategic positioning.

High attrition rate in work force – compare to other organizations in the industry ASML Holding N.V. has a higher attrition rate and have to spend a lot more compare to its competitors on training and development of its employees.

Investment in Research and Development is below the fastest growing players in the industry. Even though ASML Holding N.V. is spending above the industry average on Research and Development, it has not been able to compete with the leading players in the industry in terms of innovation. It has come across as a mature firm looking forward to bring out products based on tested features in the market.

Need more investment in new technologies. Given the scale of expansion and different geographies the company is planning to expand into, ASML Holding N.V. needs to put more money in technology to integrate the processes across the board. Right now the investment in technologies is not at par with the vision of the company.

If we looked at these weaknesses, there are some important points we need to be aware, high attrition in their workforce mean their expenses in spending on acquiring workforce would eat into its profit.

As a technology company, the money into investment for new technologies should be more.

Lower inflation rate – The low inflation rate bring more stability in the market, enable credit at lower interest rate to the customers of ASML Holding N.V..

Stable free cash flow provides opportunities to invest in adjacent product segments. With more cash in bank the company can invest in new technologies as well as in new products segments. This should open a window of opportunity for ASML Holding N.V. in other product categories.

Economic uptick and increase in customer spending, after years of recession and slow growth rate in the industry, is an opportunity for ASML Holding N.V. to capture new customers and increase its market share.

With Fed FOMC happened last night, we are looking at rate cut this year, so lower inflation and interest rate would be beneficial to ASML. This can help to increase their cash flow making it more stable for investment.

ASML would face some external threats , affecting their growth and profitability.

Rising raw material can pose a threat to the ASML Holding N.V. profitability.

Liability laws in different countries are different and ASML Holding N.V. may be exposed to various liability claims given change in policies in those markets.

The company can face lawsuits in various markets given - different laws and continuous fluctuations regarding product standards in those markets.

Imitation of the counterfeit and low quality product is also a threat to ASML Holding N.V.’s product especially in the emerging markets and low income markets.

These are factors which ASML need to be aware when they planned their outlook growth, some could be easier than others to be avoided.

The implied volatility skew shows the market's bias for pricing in volatility risk to the option premium of downside puts and upside calls.

We cam see that the implied volatility for downside puts is decreasing relative to upside calls, then that suggests the market is pricing in a better sentiment for upside move.

I personally feel that ASML is a potential semiconductor stock we can look at beyond Nvidia, as there would be more demand for their product and services in Europe, where I believe ASML is a major player.

But innovation is key to take advantage of the AI revolution. I will be watching how ASML is going to navigate the potential of the AI wave.

Appreciate if you could share your thoughts in the comment section whether you think ASML is the next one to watch for next phase of AI wave?

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.