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Worried About Risks to ASML Stock in 2024? Don’t Overlook This Small-Cap Chip Stock.

Worried About Risks to ASML Stock in 2024? Don’t Overlook This Small-Cap Chip Stock.


A new generation of semiconductors will enter production in 2024. Specialist in ultraviolet lithography ASML Holding (NASDAQ: ASML)a crucial supplier of equipment used to make chips, has begun shipping its latest generation extreme ultraviolet (EUV) systems to Intel.

Intel will begin development of its 18A manufacturing process using these machines in 2024, with a goal of widespread commercial production by 2025.

Despite this milestone, ASML will have a record year in terms of sales and profitability in 2023. The coming year, especially the first half, could be challenging as the company catches up. big delay in customer ordersand chipmakers are revamping their processes for next-generation semiconductors.

ASML stock carries a premium valuation (around 36 times expected 12-month and one-year earnings per share), so any financial bumps in the road in the new year could cause turbulence in stock prices.

If you’re worried about the near-term risks ASML faces, but still think EUV has a long growth period ahead, here’s another small-cap stock you should know about: Phototronics (NASDAQ:PLAB).

EUV is not complete with ASML systems alone

Lithography, particularly in extreme ultraviolet (EUV), has become one of the key steps in the semiconductor manufacturing process. However, the systems made by companies like ASML to produce the light source used in lithography are only part of the equation.

Light from a lithography machine is projected through a photomask (usually a multilayer plate of quartz or other combination of transparent and opaque compounds) to print the lines and patterns onto the surface of a silicon wafer – which is finally cut into chips. later.

Photronics is one of the main producers of these photomasks. It just completed another record year for sales and profitability in its 2023 fiscal year (which ended in October) and hopes that momentum continues through 2024.

Worried About Risks to ASML Stock in 2024? Don’t Overlook This Small-Cap Chip Stock.

PLAB Earnings Chart (TTM)

Every time a new chip is designed, a corresponding photomask is required for production. And with the proliferation of chips in new applications – like industrial equipment and automobiles – and more advanced chips needed for consumer devices, enterprise AI and other uses, Photronics could find itself facing a great opportunity in the years to come.

Q1 2024 revenue is expected to grow 3-7% year-over-year, so Photronics is definitely not the fastest-growing semiconductor stock. Attribute this to near-term sector weakness, like what ASML described in its most recent quarter.

What Photronics lacks in total growth, however, it makes up for in its successful focus on improving profit margins. And the company looks set to deliver on its promises next year. Adjusted earnings per share (EPS) are expected to increase 13% to 33% in the first quarter, building on its 23% adjusted EPS gain in fiscal 2023.

Phototronics could be a cheaper bet on advanced chip manufacturing

A few secular growth trends propel Photronics’ financial expectations. The first is the continued adoption of more advanced chip manufacturing technologies (including ASML’s EUV) by many manufacturers. In its most recent quarter, Photronics said high-end applications accounted for 35% of its solid-state photomask (IC or integrated circuit) sales of $164.5 million in Q4 2023.

And secondly, high-end display technology (FPD or flat panel) used in various devices from smartphones to televisions. Photronics is a leader in photomasks used in ultra-high definition OLED (organic light-emitting diode) displays. These high-end photomasks for advanced displays accounted for 85% of this segment in the fourth quarter.

Since Photronics relies on companies like ASML to install new lithography equipment for its own growth, the stock tends to trade at a lower price than some of its peers in the lithography manufacturing equipment space. semiconductors. Its shares currently trade at just under 16 times trailing 12-month earnings and less than 12 times trailing 12-month free cash flow.

For investors looking for value in a small, under-followed and underappreciated company, Photronics stock could be a preferred buy right now. Although it is a cyclical business model, as all companies closely related to the manufacturing industry tend to be, Photronics has far outperformed the current crisis in the semiconductor industry over the past year and a half.

If chipmaking is poised for another ascent, driven by developments from ASML and its ecosystem of chipmaking partners, Photronics could be poised to take a serious step forward.

Should you invest $1,000 in Photronics right now?

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Nicolas Rossolillo and its clients have positions in ASML. The Motley Fool has positions in and recommends ASML. The Motley Fool recommends Intel and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short February 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.

Worried about the risks to ASML stock in 2024? Don’t overlook this small-cap chip stock. was originally published by The Motley Fool



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