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Daily Alert - 9/18/19

Our first idea is a semiconductor industry company that beat analysts’ EPS estimates by $0.14 last quarter.

Our first idea is a semiconductor industry company that beat analysts’ EPS estimates by $0.14 last quarter. Our second recommendation is some profit-taking.

ASML Holding N.V. (ASML)
From Cabot Top Ten Trader

ASML Holding N.V. has had a couple of false starts in recent months, but the bullish fundamental story seems to be winning out. The backstory here is that ASML makes lithography systems for fabricating integrated circuits—more specifically, to imprint microscopic circuitry onto wafers. It helps customers (logic and memory chip makers) with installation, customization and training. Logic spending is being driven by the move to 7nm wafers now and will continue to be driven by successive moves to 5nm and 3nm in the future. ASML’s next-generation extreme ultraviolet (EUV) lithography systems can help customers progress through these advancements and they seem to be stacking up.

As with all chip equipment makers, the company’s business is cyclical, but it’s likely that 2019 will be a multi-year low point, with sales growth reaccelerating to 10% next year (up from just 2% this year) and with earnings expected to soar 34% to a new all-time high. The stock is doing so well right now because results, and commentary on the Q2 earnings call, backed up this reaccelerating viewpoint—orders are flowing in again (the broader semi market has been weak, but ASML reported orders up 45%!), which is seen by analysts as telegraphing a strong 2020. Importantly, management talked about strength in DRAM-related EUV orders, which represent the next wave of growth for ASML’s solutions, with likely correlation in stronger services revenue to boot. In short, the stock is strong as big investors anticipate ASML’s next leg of growth. We like it.

ASML broke out near 112 in 2017, ran to 216 early last year and then fell back to 145 at the market bottom. It got going with everything else after that, though it’s been choppy since the start of May, with two multi-week pullbacks. But as the market has improved of late, ASML has come alive, popping to new all-time highs last week on solid volume. We’re OK buying some on dips of a few points.

Buy limit: 235-241
Loss limit: 215-218

Michael Cintolo, Cabot Top Ten Trader,, 978-745-5532, September 9, 2019