To The Moon

$ASML Holding NV(ASML)$ $Taiwan Semiconductor Manufacturing(TSM)$ $iShares Semiconductor ETF(SOXX)$ $VanEck Semiconductor ETF(SMH)$

As we kick off 2025, a glance at the past reveals strong performance across various sectors, particularly in semiconductors, where we anticipate continued momentum into the year. Consequently, we’re focusing on two major players in this space, starting with ASML. This Dutch company designs and manufactures advanced photolithography machines, essential for producing intricate semiconductor chips. Their cutting-edge Extreme Ultraviolet (EUV) lithography technology is crucial for creating high-precision patterns on silicon wafers, a cornerstone of modern chipmaking.

ASML Performance& Fundamental

ASML's performance over the past year has been modest, with shares up only 3%. However, over the last decade, the company has significantly outperformed the S&P 500, gaining 626%. Currently, ASML is trading near the lower end of its 52-week range, with both Seeking Alpha and Wall Street analysts rating it a "buy." While the dividend yield is modest at 0.9%, dividend yield theory suggests the stock is slightly undervalued, as the current yield (0.89%) exceeds its five-year rolling average (0.83%).

ASML's forward price-to-earnings (P/E) ratio of 31.5 is below its five-year average of 34, signaling a potential double undervaluation. Additionally, the company has consistently surpassed earnings expectations over the past year and projects double-digit EPS growth in the coming quarters, targeting $24.80 for 2025. Based on this, the forward P/E stands at approximately 31, reflecting optimism about future growth.

Valuation and Metrics

While ASML receives an "F" for valuation, it trades at a premium of 49% compared to the sector. Despite this, some companies warrant a premium due to their market position and technological edge. Growth is rated "B-," with revenue declining 2% year-over-year compared to the sector's 4.35% growth. However, forward revenue growth over the next year is projected at 12.9%, well above the sector's 5.52%. EPS growth over the next 3–5 years is expected at 16.8%, surpassing the sector's 15.5%.

Profitability is a standout feature, earning an "A+" grade. ASML's gross margin aligns with the sector average at 51%, but its net income margin is a striking 26.4% compared to the sector’s 3.9%. Cash from operations over the past year reached $5.4 billion, dwarfing the sector's $98 million.

The company's strong balance sheet is another highlight, with a net debt-to-EBITDA ratio of zero for the past decade. This indicates that ASML could pay off its debt in less than a day using its cash reserves. Institutional ownership stands at 26%, with a slight increase in buying over the past year, although Q4 of 2024 saw increased selling activity.

Valuation Analysis

Using a Discounted Cash Flow (DCF) model, ASML's intrinsic value is estimated at $1,000 per share, suggesting a 35% upside from its current price. This calculation assumes a conservative 18% free cash flow growth rate (below the 10-year average of 35%) and incorporates the present value of future cash flows and terminal value. For transparency, at a 16% growth rate, the intrinsic value drops to $886,000, showing the sensitivity of valuation to growth assumptions.

When evaluating stocks, we consistently apply a margin of safety (MOS), starting at 10%. If a stock meets our three key criteria—wide moat, strong financial metrics, and solid forward-looking data—it receives a buy recommendation up to $900. For ASML, the current trading price of $750 reflects a 25% margin of safety. Wall Street's consensus price target of $900 suggests a 21% upside over the next year. Let us know your thoughts below—do you find ASML an attractive semiconductor stock to add to your portfolio?

Taiwan Semiconductor Manufacturing Company (TSMC)

TSMC is the world's largest dedicated semiconductor foundry, producing advanced chips for clients like Apple, Nvidia, and AMD. Over the past year, TSMC's stock has surged 103%, outperforming both ASML and the S&P 500. Unlike ASML, which trades at the lower end of its 52-week range, TSMC is at the upper end, with a "double strong buy" from Wall Street and Quant, and a "buy" rating from Seeking Alpha. Its dividend yield is slightly higher at 1.19%.

Fundamental

Based on dividend yield theory, TSMC appears slightly overvalued (1.34% yield versus a five-year rolling average of 1.19%). However, its forward P/E ratio of 23 aligns closely with the historical average of 22. Earnings projections show double-digit growth in the next year, with a 100% track record of meeting expectations. If TSMC achieves its $9.05 EPS target for 2025, its forward P/E would stand at 22.9.

Valuation

TSMC receives a "D+" grade. However, based on 2025 projections, the stock isn't far off the sector median, depending on preferred valuation metrics.

Growth

An "A-" grade reflects 23% revenue growth (sector median: 4.4%) and anticipated 14% forward growth (sector median: 5.52%). EPS growth is particularly impressive at 31.4%, far exceeding the sector’s 15.47%.

Profitability

Gross margins align with the sector at 51%, but TSMC’s net income margin is a standout at 39% versus the sector's 3.9%. Operating cash flow reached $50.4 billion in the past year, dwarfing the sector average of $98 million.

Comparison of ASML and TSMC

Over the past year, TSMC has outperformed both ASML and the S&P 500. Over 10 years, both companies have delivered exceptional returns, with TSMC slightly ahead, delivering a 1,900% total return.

Valuation for TSMC using a DCF model results in an intrinsic value of $225, with a 10% MOS bringing the buy target closer to $245, translating to 19% upside from current levels. While TSMC has less MOS and upside than ASML, its stronger historical performance and growth potential make it appealing.

Broader Semiconductor Exposure: ETFs

For those interested in broader exposure to semiconductors, ETFs like SOXX or SMH provide a diversified approach. For example, SOXX has a low expense ratio and has risen about 27% over the past year. Its top holdings include Broadcom (13%), Nvidia (11.5%), TSMC (4.35%), and ASML (4.19%). ETFs offer an opportunity to invest in the sector without focusing on individual stocks.

Conclusion: Pros and Cons

ASML

Pros:

• Market leader in EUV technology, critical for advanced semiconductor manufacturing.

• Strong growth prospects driven by AI, 5G, and automotive applications.

• Unmatched EUV technology provides a significant competitive moat.

Cons:

• Valuation risk due to frequent trading at a premium.

• Exposure to geopolitical risks like U.S.-China tensions.

• Cyclical nature of the semiconductor industry.

TSMC

Pros:

• Largest and most advanced semiconductor foundry.

• Strong client base (Apple, Nvidia, AMD) and cutting-edge 3nm manufacturing.

• Significant growth tied to AI, 5G, and high-performance computing.

Cons:

• Geopolitical risk due to its location in Taiwan.

• Cyclical industry exposure.

• Competitive pressures from rivals like Samsung and Intel.

Conclusion

ASML is a compelling investment candidate, with double buy ratings from Seeking Alpha and Wall Street. While it trades at a premium and faces challenges in valuation metrics, its robust profitability, strong balance sheet, and promising growth prospects make it a standout player in the semiconductor industry. Investors are encouraged to assess the DCF model assumptions and tailor them to their expectations for a more personalized valuation outlook.

Let me know your thoughts—are you considering ASML, TSMC, or a semiconductor ETF? Do you prefer the growth of one over the other, or would you rather gain sector-wide exposure?

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