We recently compiled a list of the 10 Unrivaled Stocks of the Next 10 Years. In this article, we are going to take a look at where ASML Holding N.V. (NASDAQ:ASML) stands against the other unrivaled stocks of the next 10 years.
Growing a business is not an easy task. Several factors come into the picture when you talk about growth. In 2019, McKinsey reported that ~50% of the companies that enjoyed healthy and stable shareholder returns but didn’t see top-line growth were either acquired or delisted. Growth is getting tougher amidst new market dynamics such as higher consumer expectations, competitive intensity, and digital disruption. Growth can only be rewarded to businesses that spot opportunities at hyper-granular levels and then seize them quickly.
Pricing Power Remains Critical, Says Legendary Investor
Warren Buffett, the billionaire CEO of Berkshire Hathaway Inc., mentioned that he tends to rate businesses based on their ability to increase prices. He pays so much attention to the pricing power that he sometimes doesn’t even consider the people who are managing the business. Buffett has had a successful career of stock picking and takeovers.
The veteran investor has bought companies in the business of railroads and electricity producers, whose pricing power comes from a dearth of competitive options available to their clients. Buffett has also built stakes in several consumer discretionary companies relying on the appeal of their brands to bring in customers.
Forecasts for 2024
Wall Street analysts expect that S&P 500 companies are expected to report steady earnings growth in 2024. They anticipate a ~5.4% earnings growth in 3Q 2024 and over ~15% earnings growth in 4Q 2024. The S&P 500’s forward price-to-earnings ratio sits at ~22.40x as of August 30. The 10-year average forward price-to-earnings ratio came at ~17.9x, suggesting that the stock valuations might be slightly stretched.
Moving forward, the US presidential election remains the most significant potential market catalyst for 2H 2024. Landsberg Bennett Private Wealth Management believes that inflation numbers might surprise to the upside towards the end of 2024 and into 2025. This is because year over year comparables might become more difficult and the effects of increased Chinese shipping rates start reflecting in the inflation data points.
Equity Market Outlook Amidst Uncertain Macro-Economic Environment
A “higher-for-longer” backdrop favoured larger and higher-quality companies that are less cyclical and rate-sensitive. Such companies were supported by mania in Artificial Intelligence/Large Language Models (AI/LLM) stocks. JPMorgan believes that, in the US equities, momentum crowding and stock market concentration reached multi-decade extremes.
Market volatility in the US remains low, with VIX averaging only ~14 for the year to July 2024. This was mainly because of fundamental and technical factors, such as rising markets, risk complacency, and lower realized correlation, among others.
In Europe and other areas, the broader equities were supported by improved economic activity and the expectation of multiple Fed cuts at the start of 2024. However, the growth-policy trade-off might worsen in 2H 2024. JPMorgan believes that “there is a risk of disappointment.” The large bank expects that the Fed might stay ‘higher-for-longer,’ US activity momentum might decelerate and there can be a softening of pricing and top-line growth. Collectively, this might hurt earnings delivery in 2H 2024. Therefore, investing in stocks with wide economic moats and companies having significant market share should help offset the losses in the remainder of 2024.
Our methodology
To list 10 unrivaled stocks of the next 10 years, we sifted through wide moat ETFs and checked online rankings. Next, we narrowed our list by filtering out the companies that have held a near-monopoly status for years or decades. Finally, we ranked the stocks in ascending order of the number of hedge funds that hold them, as of 2Q 2024
At Insider Monkey, we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A technician in a clean room working on a semiconductor device, illuminated by the machines.
ASML Holding N.V. (NASDAQ:ASML)
Number of hedge fund holders: 81
ASML Holding N.V. (NASDAQ:ASML) is the leader in photolithography systems, which are used in the manufacturing of semiconductors. Photolithography refers to the process in which a light source is used to expose circuit patterns from the photomask onto a semiconductor wafer.
ASML Holding N.V. (NASDAQ:ASML) enjoys a significant moat in the lithography market. Its systems are the most advanced in the world, because of which its would-be competitors would require a significant amount of expertise to operate. The company also has a long-term monopoly on EUV lithography systems. EUV refers to the most advanced lithography technology, which finds its usage in the manufacturing of the smallest and most complex chips.
The company’s leading competitive advantages include intangible assets, cost advantages, and switching costs. Over the next decade or so, ASML Holding N.V. (NASDAQ:ASML) should remain the top lithography provider for semiconductor foundries, or fabs. This is because of its technological leadership and large R&D budget, which acts as a big entry barrier. Also, there are high switching costs for semiconductor foundries whose plants are designed from ASML Holding N.V. (NASDAQ:ASML)’s lithography machines.
ASML Holding N.V. (NASDAQ:ASML) is dominant in its lithography market, having an ~82.9% market share. Experts have tagged this company as a “kingpin” or “key enabler of several important sectors”, which includes mobile communications, data centers, and artificial intelligence (AI).
Susquehanna increased its price target on shares of ASML Holding N.V. (NASDAQ:ASML) from $1,200.00 to $1,300.00, giving it a “Positive” rating on 11th July. As per Insider Monkey’s 2Q 2024 database, ASML Holding N.V. (NASDAQ:ASML) was in the portfolios of 81 hedge funds.
Polen Capital, an investment management company, released its fourth-quarter 2023 investor letter and mentioned ASML Holding N.V. (NASDAQ:ASML). Here is what the fund said:
“Netherlands-based ASML Holding N.V. (NASDAQ:ASML) and Japan-based Lasertec play dominant roles within different segments of the global semiconductor industry. In both cases, shares rallied significantly in the fourth quarter of 2023, prompting our positions to grow as a percentage of the overall portfolio. We believe both companies will see demand for their products as extreme ultraviolet (EUV) lithography and soon high-numerical aperture lithography must be utilized to manufacture the world’s smallest chips. However, in our estimation, 2024 could deliver a year of less exciting growth for the semiconductor industry, which prompted us to trim these positions back.”
Overall ASML ranks 6th on our list of the unrivaled stocks of the next 10 years. While we acknowledge the potential of ASML as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than ASML but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
