ASML reiterated as Top Pick at Citi despite falling out of favor with investors

ASML (AS:ASML ) has seen a shift in investor sentiment in recent months. Despite its recent decline in popularity among investors, analysts at Citi Research in a note dated Wednesday remain steadfast in its bullish outlook on the company.

ASML continues to hold its place as Citi’s top pick within the European technology sector, with the bank reaffirming a "buy" rating and stressing strong upside potential.

While near-term headwinds exist, Citi’s analysts underscore the company’s unique positioning and robust long-term growth prospects.

Over the summer of 2024, ASML faced a dip in investor confidence due to a weaker semiconductor cycle and capital expenditure cuts by Intel, one of ASML’s key clients.

These factors have dampened expectations for the company’s performance in 2025, particularly in terms of revenue and profit growth.

Some investors have voiced concerns, shifting their revenue expectations for 2025 toward the lower end of the company’s guidance range.

“We lower our 2025E revenue estimate to €36bn, just above the midpoint of the €30-40bn range, to take into account a slower cycle and Intel pushouts,” the analysts said.

However, analysts at Citi believe that this negative sentiment is overstated. They have reduced their 2025 sales estimate for ASML by 5%, in contrast to the larger swings suggested in some investor conversations.

Citi’s view remains positive on ASML’s long-term outlook, citing the company’s leadership in advanced semiconductor manufacturing technology as a crucial differentiator.

The semiconductor industry’s growing demand for high-end logic chips, particularly from key players like Taiwan Semiconductor Manufacturing Company (TSMC), continues to benefit ASML, which has a dominant position in the market for extreme ultraviolet (EUV) lithography systems.

Citi expects ASML’s revenues to reach €36 billion in 2025, a 30% increase despite the challenges posed by Intel’s spending cuts and a sluggish broader cycle.

ASML's growth is expected to outpace its peers in the semiconductor equipment industry, with its tool revenue forecasted to grow by 34%, far ahead of the competition.

This growth will be driven by ASML’s exposure to leading-edge logic demand, where its high-value EUV systems play a pivotal role in enabling the production of advanced chips.

Citi also flags two key elements driving ASML's growth, that is increasing lithography intensity and continued improvements in tool productivity.

As chip manufacturers push the boundaries of semiconductor technology, the demand for ASML’s EUV systems is expected to rise.

“Beyond the near-term, we think ASML’s long-term outlook is intact, with upside from AI and a strong increase in tool productivity/litho intensity,” the analysts said.

Additionally, ASML is continuously enhancing the productivity of its tools, making them even more attractive to chipmakers who are looking to increase their output while reducing costs. This focus on innovation positions ASML as the clear leader in its field.

“We expect the combination of healthy 3Q orders (est. €5.5bn) and a positive CMD to drive improving sentiment and valuation, which at 23x 2025 is near trough levels,” the analysts said.

Analysts at Citi anticipate that the CMD will provide further clarity on ASML’s revenue targets for 2030, particularly as the demand for AI chips continues to expand.

Despite the current dip in investor sentiment, Citi remains confident in ASML’s valuation. The company’s shares are currently trading at a forward price-to-earnings (P/E) ratio of 23x for 2025, which is near its historical trough levels.

Citi has adjusted its target price for ASML from €1,250 to €1,150, but this still represents a potential upside of over 60% from current levels. According to Citi, this presents a compelling buying opportunity for investors, particularly those with a long-term perspective.

Source: Investing.com