Mizuho bullish on this underperforming chip stock

Investing.com -- Mizuho analysts shifted their favorite semiconductor stock from TSMC to ASML (AS:ASML ), citing a compelling risk-reward opportunity as the stock has underperformed its peers.

In a note, Mizuho highlighted that while TSMC shares have risen 16% in September, ASML has lagged significantly, up just 0.8% during the same period.

The analysts now see ASML as their top pick for year-end gains, presenting it as an attractive long-term investment.

"ASML is my new favorite single semi long into year-end," a Mizuho analyst wrote, pointing to the stock's underperformance relative to both the broader semiconductor sector and major players like Nvidia (NASDAQ:NVDA ) and TSMC. The analyst sees a "compelling risk-reward with limited downside" for the stock. 

They highlighted that market sentiment around ASML has been weighed down by concerns over Intel (NASDAQ:INTC )'s capital expenditure cuts and risks related to China restrictions.

However, Mizuho believes this presents a buying opportunity, given the negative sentiment already factored into the stock's price.

Looking ahead, Mizuho expects ASML's third-quarter results in October to be stable and views the company's upcoming investor day on November 14 as a key event.

They noted that ASML management is not expected to lower its long-term revenue targets for 2025, which are currently estimated between €30-40 billion. According to Mizuho,

"I sense buyside now expects €32-33 billion at best," added the Mizuho analyst, suggesting that even modest reductions in estimates could clear the way for a rally.

The analysts also see ASML as well-positioned for a rebound in lithography tool spending, forecasting that the company's valuation could expand back to a 30-32 forward P/E range.

With EPS estimates for 2024 already coming down, Mizuho sees limited downside and significant potential for upside.

"ASML valuation can expand back more towards 30-32 forward P/E range vs the compressed level of 26-27 right now," Mizuho added.

Source: Investing.com