A tech stock to buy now while there is a chance

A well-known technology play has fallen sharply, but overseas investing expert Rodney Hobson believes the current level is a floor and that those hoping for capital gains should get their reward soon.

30th October 2024 08:37

by Rodney Hobson from interactive investor

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In a world where we have chips with everything, one might have expected ASML Holding NV (EURONEXT:ASML) to be flying high. Yet latest figures from one of the biggest suppliers in the semiconductor industry caused shock waves among investors. Perhaps we have been expecting too much too soon.

The Dutch technology group puts circuit patterns on computer chips so they can be put to a wide range of uses. In some applications it has nearly 90% of the market. It also sells software and services.

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With demand for chips soaring globally, revenue and profits more than doubled over the three years to 2023. However, orders in the third quarter of this year came in at only about half the level that analysts had forecast, prompting ASML to reduce its forecast for next year.

Sales for this year are now likely to be only just ahead of the €27.6 billion recorded last year and net income could fall slightly short of the €7.8 billion achieved in 2023.

Such is the wonderful world of technology that the annual growth of over 20% that ASML enjoyed for several years could return with the next great leap forward, but in the meantime investors would do well to settle for high single digits, which seems eminently attainable. ASML is constantly improving the performance of its products, justifying higher selling prices even as input prices are easing.

Although customers are limited to a select few technology businesses, with the likes of TSMC, Samsung and Intel Corp (NASDAQ:INTC) taking probably half ASML’s output, there is room for one or the other to increase purchases to take up any slack.

A more serious worry is that China, a major player in the chip market and an important customer for ASML, will get caught up in another trade war with the US and the European Union.

The stock briefly topped €1,000 as recently as July before going into freefall. At around €660 the shares are back where they were three years ago, but this kind of level has proved to be both a ceiling and a floor in the meantime. This should once again provide a floor. In any case, this is a more realistic level after the great surge into American tech stocks earlier this year produced overblown share valuations.

The price/earnings (PE) ratio is factoring in recovery at 38 while the yield is admittedly rather sparse at just under 1%.

Source: interactive investor. Past performance is not a guide to future performance.

Hobson’s choice: Demand for chips, especially specialised ones, is bound to bounce back from any short-term decline. Likewise ASML’s share price, so buy now while there is chance. Those hoping for capital gains should get their reward soon; those investing for income will have a somewhat longer wait.

Update: The strong US dollar has dented profits at drinks and snacks maker Coca-Cola Co (NYSE:KO) and will continue to do so into next year. Despite costs staying broadly unchanged, net income fell 7.6% to $2.85 billion in the third quarter to 27 September, with net operating revenue down 0.8% to $11.85 billion.

Although the company is operating at the top end of its long-term growth plans and should be able to boast organic revenue growth of about 10%, adverse foreign exchange movements will chop a similar percentage off earnings and about 4% off comparable revenue. It is already expecting currency headwinds in low single digits in 2025.

Two weeks ago I favoured Coca-Cola over rival PepsiCo Inc (NASDAQ:PEP), which had just produced its own results, although I did say Coca-Cola only just remained a buy at around $72.50 and investors might prefer to see if they could buy in at a lower level. Its shares tumbled 2.1% to $68 on the disappointing results. They have now stabilised at $66 and I feel the downside is limited at this point. Such an iconic brand deserves to have its buy recommendation restored unequivocally.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.

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