Potential for stock record highs

The semiconductor industry has become the centerpiece of every investor’s portfolio in recent months, as technology stocks have outperformed nearly every other sector over the past 12 months. Led by names like Nvidia Co. NASDAQ:NVDAthe semiconductor rally has another set of lungs, which has yet to get the recognition it deserves.

Concerns that Nvidia stock may now be overextended are growing, crystallizing a 14% retracement from its all-time high price of $974 per share; It looks like Nvidia needs a breather before potentially returning to its uptrend. Other investors see potential opportunity in buying Taiwan Semiconductor Manufacturing Co. New York Stock Exchange: TSM. However, geopolitical risks prevent the stock from receiving the valuation it deserves.

There is a third name, perhaps underestimated ASML company NASDAQ:ASML. While not a direct semiconductor manufacturer, it is the company that essentially every chipmaker relies on, as it makes the lithography equipment needed to make these chips.

It’s all about risk and reward

While investing in Taiwan Semiconductor may seem a little riskier, especially now that China is threatening to invade Taiwan and compromise the company’s operations, ASML offers investors a somewhat safe haven.

These two names are co-dependent, meaning that TSMC relies on ASML to provide it with the equipment to produce some of the world’s latest lithography technologies. This allows TSMC to keep pace with its sub-10 nanometer chip designs.

Because of this relationship, ASML is directly linked to the success of Nvidia and even the success of other, more established brands Intel Co. NASDAQ: INTC.

In fact, Intel is one of ASML’s largest customers, second only to TSMC. For TSMC, its biggest customers are none other than Nvidia and The Apple company. NASDAQ:AAPL; This way investors can connect the role ASML plays in the global supply chain.

ASML shareholders are exposed to the upside of the semiconductor sector without worrying about all these geopolitical risks, especially now that TSMC has received an $11 billion grant from the US government in an attempt to offshore semiconductor manufacturing.

Despite these efforts, it will likely take a couple of years before these factories are built and operational, so bringing TSMC’s manufacturing capacity to the United States won’t be an overnight job. For this reason the international risk remains, but not for the ASML.

The gap is evident for ASML

Two factors typically determine stock prices: earnings per share (EPS) growth and how markets value these potential future earnings today. For ASML, Wall Street analysts believe that the upcoming quarterly earnings announcement could catalyze the stock to new highs.

The expectation to see 42% EPS growth this year underlines this first-quarter announcement, especially as the entire semiconductor industry is looking to grow its earnings at an average rate of 26%.

This growth compares to Nvidia’s forecast EPS growth of 13% over the next 12 months, which is less than half that of ASML. Not even Taiwan Semiconductor, Nvidia’s main supplier, comes close to ASML in its 24% projection.

On a valuation basis, the forward P/E ratio is useful (as it attempts to value tomorrow’s earnings today), making ASML an attractive proposition. With a forward P/E of 31.3x, ASML is close to Nvidia’s valuation of 32.4x.

If investors could get more than double the growth for the same price, why would they choose Nvidia stock over ASML? Those who stick with Nvidia are simply relying on market momentum and popularity.

Another interesting aspect is found in Intel. Analysts are boldly betting that its EPS could grow 115% this year. However, markets value these potential future earnings at 17.3 times, nearly half that of Nvidia and ASML. The saying “it has to be cheap for a reason” applies here too.

Considering that TSMC, and not Intel, received the majority of funding in the CHIPS and Science Act, markets may not be too sure that Intel will be able to achieve this growth. However, if the markets get it wrong and Intel comes out on top, it will be ASML that will deliver all the upside without any uncertainty as Intel cannot succeed without ASML.

Wall Street’s vote for ASML

Analysts at Wells Fargo & Co. New York Stock Exchange: WFC they raised their price targets on ASML to $1,150 per share, predicting a 20% upside from today’s prices. Meanwhile, Nvidia’s consensus price target of $926.3 gives it just 5% to rise from today.

The markets aren’t the only ones buying ASML’s growth story and reviving the stock. In the last quarter, The PNC Financial Services Group Inc. NYSE:PNC increased its position in the stock by 4%, bringing its total stake to $24.8 million.

Fisher Asset Management, known for its macro value strategies, increased its position by 2%, for a total investment of $3.4 billion in ASML shares.

Last but not least, the bears have no plans to stop the rally, as short-term interest in ASML stock has declined for two consecutive months, bringing its net dollar amount to short levels not seen since April 2023 , when the stock reached its highest for that year.

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