Discover this incredible opportunity in the chip sector now

Investors should keep a list of the top stocks they want to buy but may not have bought yet due to high valuations. One of those companies is ASML Holding (ASML -2.22%)and it’s one I always wanted to own, but it eluded me. The purpose of these lists is to keep them on your radar; if the stock price drops, you can pick up shares (if the opportunity arises).

ASML recently plunged more than 20% after reporting earnings and is now almost 40% below its all-time high. While I saw this as a buying opportunity, others saw it as a selling sign. Understanding why the other party is selling can help you determine whether now is a good time to buy the stock or not.

Government restrictions put a damper on ASML’s growth

ASML is probably one of the most critical companies in the world, yet few are aware of it. ASML makes lithography machines for chip manufacturers. These machines lay out the microscopic traces on chips with a distance of only 3 nanometers (nm). For reference, a human hair is about 80,000 to 100,000 nm wide.

No one else has the technology that ASML has, so it is essentially a technology monopoly. Although this has not yet caused ASML any regulatory problems, it has created export problems. Western governments don’t want these machines to fall into the hands of China or its allies, so they have banned sales of the most high-tech machines to China. However, ASML still sells some of its less advanced machines to them, although some of the installed bases in China can no longer be maintained as the Dutch government (ASML is headquartered in the Netherlands) aligns its policy with the US to to guarantee this. technologies cannot be used by the Chinese.

This is a problem for ASML, as about half of its revenue in the third quarter went to China. However, this is an abnormally large portion of the Chinese business, and management expects China’s contribution to total business to return to normal levels by 2025.

But because ASML is not allowed to sell to anyone it wants, its financial results are starting to be affected. Originally, ASML predicted a turnover of between 30 and 40 billion euros for 2025. However, during the third quarter conference call, the company lowered that range to 30 billion to 35 billion euros. This worried investors and caused the stock to plummet after the earnings results.

I took this opportunity to pick up some shares because I don’t think it’s as bad as some people think.

ASML shares are still expensive after the decline

While it was disappointing to see revenue expectations decline, range management still drove project growth by 2025. Management expects a turnover of 28 billion euros for 2024, so range management projected between 7% and 25% growth for 2025 projects.

That’s not a bad year for most companies, and I think management is probably setting lower expectations now so that they can change the story when sales reach the top end of the range (remember, 35 billion euros was the midpoint of the old guideline). I also wouldn’t be surprised if ASML provided stronger guidance for 2026 at its investor day on November 14, as management was quite adamant about expanding its outlook at that event, and not on the earnings call.

Still, I agree with the current revenue prospects, especially after the drastic drop in share prices. If you want to get into ASML shares, they are still trading in the same range as just after the drop as the shares have not yet recovered.

ASML PE ratio data Ygraphs

Stock trading is over 33 times future earningsIt’s not a cheap stock, which means it was terribly duration prior to the drop (which is why I avoided it). However, that valuation is quite in line with the fact that other major tech companies are growing at about the same pace as ASML, so I’m fine with paying that still-expensive price tag. Because ASML has a technological monopoly, I am even more confident that the company will be successful in the long term.

An investment in ASML is a bet that we will need more advanced chips and a larger quantity of them in the future. I think that’s a pretty safe bet, which now makes ASML a great buy if you have a long-term investment horizon (more than five years).