Just released last week were ASML Holding financial statements. Mostly, the financial data was in line with expectations, albeit slightly higher. ASML Holding produces semiconductor equipment and other items. In some regard, they are the only producers of certain products in the entire world. That is a monopoly, and as a value investor, having a monopoly means pricing power, something I am always keen on.
As an investment, a value investor would find many aspects of ASML Holding that are appealing, except one. ASML stock is overvalued when compared to alternative investments such as the benchmark 10 year US Treasury. In fact, far too many companies are overvalued when compared to the benchmark because they have been entrenched in a low interest rate environment. That is shifting. And, the benchmark is becoming more and more important and a focus – stocks broadly have been pressured because of this.
As of my writing this post, the Federal Reserve is meeting to determine the next phase of interest rates. Mostly, the market is expecting interest rates to remain on hold for now. But, and as early as this Friday, more economic data will tell Mr. Market what is next with interest rates when we get economic data from non-farm payrolls. If the economy remains robust, shifts will continue.
Projected Revenue
As far as ASML Holding goes, continually increasing revenue is projected by analysts. But, this assumes that the economy remains in tact and continually expanding. I am not precisely in the camp that suggest the US economy will remain in an expansionary mode for now. My expectation is that we see higher inflation and the Fed most to constrict the rise in inflationary pressures. That would contain revenue growth. So, I am no 100% on board with continually increasing revenues and that is my position across the board relative to all companies.
Net Margins
Regardless of future revenue projections, ASML Holding is a solid performing company with what they are able to retain from the revenue it brings in. At net margins of ~35%, this far outperforms the broader stock market and is what drives ASML stock price much higher. Investors seek out the revenue growth rate as well as the retention of as much of that revenue as possible. This shows up in net margins.
Projected EPS
Earnings Per Share projections are solid for the next few years. I factored the next four quarters and came up with a total of $19.91 EPS projections over the next four quarters. Given this, and with a stock price of $600.00, that puts the yield for an investment in ASML stock at 3.325%. However, the US 10-Year Treasury yield is currently at ~4.850%. As an alternative, the benchmark is much higher than what an investor can expect out of ASML.
The next question becomes: what happens next with interest rates?
The short answer as of the time of this writing is that we do not know right now. Interest rates, at the very least, will remain higher for longer. This means that stocks will need to adjust to an alternative that is higher… and will remain so for longer. This will pressure stocks lower and lower within this new economic & investing landscape.
But, will interest rates move even higher? That possibility exists and we will get more information later this afternoon with the Federal Reserve meeting and press conference. Then, on Friday we get non-farm payrolls. If this number continues to be robust, expect bond sellers to continue to push prices downward, sending yield higher.
ASML Chart
I am moving through about 250 Tech Stocks to get a better handle on what to invest in. My expectation is that interest rates will remain higher for longer, and likely to move even further higher. This is going to pressure prices downward, pushing yields upward. Stocks, and stocks like ASML stock, are going to adjust lower in this investing environment.
I see very little downside risk to an investment in bonds. But, I see a tremendous amount of downside possibility with investing in stocks as they have not adjusted downward enough. With a future earnings of $19.91, I would expect that for ASML to attract investors, the yield would have to be above the current 10-year US Treasury, the benchmark. Most investors would continuously shift out of their holding of stocks and buy the Treasury because there is little downside, and higher return.
I would not touch ASML stock until it hits $300.00 – $350.00. But, that is in its current form. If ASML stock were to fall that low, the next question is what happens to overall revenue projections along with EPS projections. In an environment where interest rates remain higher for longer, and even go further up, ASML Holding will not hit its revenue projections nor EPS projections. ASML stock is going down and likely to hit levels of about $250.00.