Chip stocks have been soaring with Nvidia rocketing after the company trounced earnings estimates and provided what many pundits were quick to label as a guidance for the ages.
The move adds to a recent fever over AI-based technologies and stocks, which provide vast potential for growth.
ASML — making the IBD Big Cap 20 list and the current leader of IBD's semiconductor equipment group — offers a great buying opportunity for those wanting to ride the AI-growth trend.
Netherlands-based ASML produces lithography, metrology, and inspection systems for memory and logic chip manufacturers. Clients include big names such as Intel, Samsung and Taiwan Semiconductor.
ASML Stock Pops On Demand Outlook
The rosy outlook for Nvidia is especially sweet for ASML because Nvidia does not actually produce its own chips. It relies on Taiwan Semiconductor, which in turn needs ASML. Hence Thursday's rally in ASML stock should come as no surprise.
The move was even more meaningful because it moved ASML back into a buy zone, repassing a 683.28 buy point from a cup-with-handle base it originally passed on May 18.
For a supercharged growth story, ASML fits the bill.
The company expects net sales to increase 25% this year. After reporting earnings of $15.13 per share last year, EPS is estimated to increase to $20.39 and $24.50 in 2023 and 2024, respectively. With the results from Nvidia, it is likely that this guidance will be revised even higher.
As with any sector experiencing hype, investors need to be cautious. While it is clear that AI will drive some productivity growth, the question is whether current valuations are overly optimistic or pessimistic for future growth.
ASML Stock A Less-Volatile AI Play
Nevertheless, for investors wanting to dip their toes in the hot industry, ASML is a lower-risk bet than many of its highflying peers.
As a comparison, Nvida and Advanced Micro Devices have annualized volatility of 59% and 53%, respectively, over the past year. ASML stock has realized only 43% volatility.
In addition, with a strong competitive advantage over its peers, ASML's lithography systems are second to none, giving it significant pricing power for its products.
If the demand for chips remains robust, this could lead to soaring profits for the company. However, if higher interest rates and a global recession take hold, leading to lower chip demand, gains may quickly be reversed.
ASML stock boasts IBD's top Composite Rating of 99 and an EPS Rating of 95. Shares are currently trading in a buy zone and with a relative strength line back at new highs.