Overlooking the Opportunity in a Distinct Semiconductor Stock if Your Portfolio Consists Solely of an S&P 500 Index Fund
Overlooking the Opportunity in a Distinct Semiconductor Stock if Your Portfolio Consists Solely of an S&P 500 Index Fund
Investing wisely in the stock market involves purchasing an S&P 500 index fund. This decision guarantees a diverse portfolio, ensuring you possess minor shares of the market's biggest triumphs. Since a few companies largely influence the index's annual profits, it's crucial to own shares in those companies to achieve decent returns.
Over the past two years, the biggest victors in the stock market have been AI stocks. Companies like Nvidia, Apple, and Meta have been significant contributors to the S&P 500's returns in 2024. If you own an S&P 500 index fund, you already hold a substantial portion of these global titans.
However, the S&P 500 excludes numerous companies profiting from AI advancements. The index only includes financially stable, U.S.-based organizations. Consequently, investors solely focusing on an S&P 500 index fund might miss potential significant gains.
Because the S&P 500 does not encompass internationally acclaimed firms, index investors may be overlooking a remarkable company pivotal to AI progress. Dutch organization ASML（ASML 2.18%）doesn't meet the S&P 500 criteria, but investors should not disregard its semiconductor stock. Fortunately, this opportunity remains open.
Essential equipment for the AI explosion
ASML does not manufacture semiconductors itself yet offers essential equipment to enable foundries to optimize their resources. ASML markets semiconductor lithography machines, such as deep ultraviolet (DUV) and extreme ultraviolet (EUV) machines. These gadgets facilitate low-error-rate chip pattern printing on silicon wafers.
ASML is the sole organization producing EUV machines, crucial for producing the most advanced AI chips. As major tech corporations construct massive data centers centered on generating and running generative AI models, they must tackle challenges like space and energy consumption. More efficient chips address these issues, but creating powerful, energy-efficient chips necessitates ASML's machinery.
The company's future is exceptionally promising. Management anticipates semiconductor sales for data centers will touch $350 billion by 2030 due to AI investment escalation. Overall semiconductor sales could exceed $1 trillion by that year, representing a 9% annual growth rate up to 2030.
Significantly, ASML will likely surpass the overall semiconductor market growth. This is due mainly to ASML's unique leadership in the competitive landscape and long-lasting connections with major foundries globally. Planning for a new machinery takes years, and existing machinery has a lifespan of 20 to 30 years, ensuring ASML's prominence in top foundry facilities for the foreseeable future.
Furthermore, ASML's EUV machines are more intricate than its DUV machines. Consequently, ASML will likely generate more revenue from servicing its machines over the long term. This could lead to improved gross margins as well.
One of the best investments in artificial intelligence
ASML experienced a downturn in the second half of 2024 as it grappled with the sales slump in the second half of 2022. Management revised its 2025 revenue forecast to between €30 billion and €35 billion ($31.1 billion to $36.3 billion), a decline from its previous estimates presented at its 2022 analyst day. It also lowered its expected gross margin for the following year to between 51% to 53%.
Investors who appreciate ASML's long-term potential may discover a lucrative bargain. As mentioned, ASML should outperform the 9% growth in semiconductor expenditure due to its distinguished market position. Moderate double-digit revenue growth combined with improved EUV sales and service revenue leverage could result in substantial growth in operating profits throughout the next half-decade.
Management forecasts €22.1 billion ($22.9 billion) in operating income at the midpoint of its 2030 outlook. This is an improvement from €8.8 billion ($9.1 billion) this year. Representing a 17% compound annual growth rate through the end of the decade.
Shares currently trade at approximately 30 times analysts' consensus 2025 earnings estimate. However, the high price may seem justifiable due to low expectations for 2025. Investors focusing on ASML's long-term potential can identify its genuine value as much higher, with semiconductor sales expanding throughout the decade.
If you've stuck with an S&P 500 index fund, you might consider allocating a modest portion for ASML. If the index included it, it would have a weighting of around 0.5%. This could be an ideal starting point.
Even if you're not an index investor, ASML's merits warrant closer scrutiny. It might be an excellent addition to any well-diversified portfolio.
Given the current market situation, investing in ASML's semiconductor stock could offer significant returns, even for those who solely own an S&P 500 index fund. Despite not being included in the index, ASML's unique position in the semiconductor market and its role in AI chip production could potentially yield higher returns.
Furthermore, diversifying your portfolio by considering investments outside of the S&P 500 index, such as ASML, can help mitigate risks associated with focusing on a single index and ensure you capitalize on potential gains in other sectors, like artificial intelligence and semiconductors.