ASML: Love the Company, Hate the Stock
2023.09.14 10:44
The bedrock of the modern economy is the microchip. There is at least one in nearly everything that uses electricity to function. From cars and mobile phones to washing machines and airplanes. Microchips, also known as semiconductors, power the world. Another area where microchips are vitally important is modern warfare. This makes ASML Holding (NASDAQ:) the most important company in the world.
There are several microchip manufacturing companies. There is Samsung in South Korea, TSMC in Taiwan, as well as Intel (NASDAQ:) and Texas Instruments (NASDAQ:) in the USA. They all produce chips at their own foundries, also known as fabs. But the machines they use to produce the chips are manufactured by only one company and that is the Dutch ASML.
The technology that makes all cutting-edge chips, and therefore modern lifestyle possible, is called extreme ultraviolet lithography. A single EUV lithography machine costs north of $200 million. It relies on a supply chain of over 800 other companies to deliver hundreds of thousands of parts from all across the globe. Many of these companies exist because of only one customer – ASML.
The complexity of both the technology and the supply chain gives ASML a strong competitive advantage. The time and cost it would take a competitor to replicate the entire process of making a single EUV lithography machine creates very high barriers to entry. That’s why ASML is expected to remain a monopoly for at least the next couple of decades.
The company’s monopoly position in the growing semiconductor industry allows it to post very attractive financial results. Its sales have been steadily growing year in and year out, accompanied by high-profit margins and a strong net cash position. The stock price has been closely following the trajectory of the business, climbing 36-fold from its bottom at $16.42 in 2008.
It is safe to say that ASML is truly an exceptional, one-of-a-kind company. Investors, smart enough to recognize this fact early enough, have been generously rewarded. On the other hand, the ones, who only recently found out about it, not so much.
ASML Holdings Daily Chart
Similar Elliott Wave setups occur in the Forex, crypto, and commodity markets, as well.
ASML reached an all-time high of $896 a share two years ago, in September 2021. In October 2022, it fell to $363 and changed for a drop of nearly 60% in 12 months. This crash was a good example of the fact that even the best company cannot be worth infinite dollars per share. At some point, its valuation inevitably reaches an extreme from which it simply cannot climb any further.
On the bright side, by July 2023, ASML stock had more than doubled from its 2022 low to $772. And just when it seemed like a new record was only a matter of time, the price started falling again, to $617 as of this writing. Unfortunately for the bulls, this is probably more than just a brief dip.
The chart above puts ASML ‘s stock price development over the past two years into the Elliott Wave context. It reveals that the crash from $896 to $363 is a five-wave impulse pattern, marked 1-2-3-4-5 in wave (A). Two lower degrees of the trend are visible within the structure of wave 3. Wave (v) of 3 is an ending diagonal.
The recent rally from $363 to $772 must then be a three-wave correction in wave (B). It can be seen as a simple A-B-C zigzag, where waves A and C are both impulses, marked i-ii-iii-iv-v. If this count is correct, wave (C) has already begun. It is supposed to breach the low of wave (A), putting downside targets near $300 a share within the bears’ reach. From the current level of $617, that would be a drop of more than 50%.
This is how Elliott Wave analysis allows us to simultaneously love the company and hate the stock. In terms of its business, ASML is untouchable. The stock market, however, doesn’t always recognize that fact. It forgot about it a year ago, when the share price was down 60%. It is likely to do so again over the next several months.
Not to mention that ASML ‘s revenue growth rate has been slowing recently and the company is not exactly cheap at 29 times forward earnings. It will be a steal close to the $300 mark, though. We remain on the sidelines until then.
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