1 Brilliant AI Stock to Buy Before 2025

Despite some concerns about a bubble in the artificial intelligence (AI) sector, AI stocks are once again rising near all-time highs following the Federal Reserve’s decision to cut benchmark interest rates.

A measure of AI stocks, the VanEck Semiconductor ETFan exchange traded fund (ETF) that matters Nvidia, Taiwan Semiconductor Manufacturingand Broadcom like its top three holdings, it’s up 10% from two weeks ago, though it’s still down 16% from its July peak.

One AI stock in particular looks oversold, expects an earnings rebound, and has a wide economic moat due to its unique product advantages, all of which make it a great buy for the new year.

I’m talking about ASML (ASML -0.16%)leading manufacturer of lithography systems, machines that use light to make semiconductors.

Image source: Getty Images.

What is ASML?

ASML is a Dutch company that was founded in 1984 as a joint venture between the electronics company Philips and Advanced Semiconductor Materials International (ASMI), a chip manufacturing machine manufacturer.

After several decades of innovation, new product launches and acquisitions, ASML is the clear leader in lithography systems today. It introduced its first prototype extreme ultraviolet (EUV) machine in 2010, which uses a shorter wavelength that allows for smaller chip features that make them faster and more powerful.

EUV machines have become the next-generation standard for semiconductor manufacturing, but ASML is still the only company that makes them. It has competitors that make less advanced deep ultraviolet (DUV) devices.

This gives ASML a wide economic moat because EUV machines are very expensive to make, and the company has unmatched intellectual property, a long history of research and development, and key relationships with suppliers and customers in the industry. ASML has spent 20 years developing the technology, working with suppliers and partners to make it happen.

The cars are extremely complex, containing around 100,000 parts, and shipping them requires dozens of containers and cargo trucks, as well as three cargo planes. In a typical quarter, ASML sells a small number of these very expensive cars. In the second quarter, it sold 100 lithography systems.

Where is ASML today?

Due to its dominance of its industry, ASML has built a formidable business, on track for more than $30 billion in revenue this year, and is very profitable, with an operating margin that has hovered around 30% in recent years. years.

However, the company faces challenges. The industry is emerging from a cyclical downturn after earnings rose in 2023, and management said 2024 will be a transition year as strong demand is expected to return in 2025.

Separately, the intensifying technological cold war with China has also affected the business. In response to US demands, the Dutch government has restricted ASML from exporting its most advanced systems to China, which could hurt its revenues.

Why the stock is a pre-2025 buy

Sluggish growth in recent quarters, worries about China and worries about a broader bubble in AI have weighed on the stock since its peak in July. ASML is down 28% since then.

However, looking ahead to 2025, the future looks much brighter as the company expects strong sales growth next year, seeing secular growth in key semiconductor markets such as green energy, electrification and new applications.

In addition, the foundry industry is on the verge of a construction boom as a number of chip stocks such as TSMC, Samsung and Intel plans to open new factories to meet skyrocketing demand for semiconductors in the AI ​​era. This should ensure a bright future for ASML over the next five years as it faces no competition in EUV machines.

While its earnings are currently suppressed due to the cyclical slowdown, the stock trades at a forward P/E of just 24 based on 2025 earnings estimates. Given ASML’s competitive advantages and future growth opportunities, the stock looks as a steal at that valuation.