Analysis-Is chip giant ASML about to hit a ceiling, or break through it?

ASML's Market Position and Future Prospects

By Toby Sterling and Nathan Vifflin

AMSTERDAM, Jan 29 (Reuters) - ASML's latest results reignited the rally that has made it Europe's most valuable company, until questions about its capacity to meet record orders sent the stock sliding - highlighting just how stretched expectations have become.

Shares in the Dutch chip-machine maker initially hit new highs after it reported fourth-quarter earnings on Wednesday, before reversing to end down 2%.

Current Stock Performance

The whipsaw trading underscores how the firm, whose tools are used by chipmakers such as Taiwan's TSMC to produce AI chips for Nvidia, is testing the limits of investor appetite.

Analyst Insights on Valuation

ASML shares are up 34% so far this month and trade at 42 times 2026 earnings estimates, well above Nvidia's 25 times, as analysts have ratcheted up forecasts. ASML management sees sales growth this year ranging from as low as 4% to as high as 19%.

"Much of the good news is then already priced in," said Han Dieperink, chief investment officer at Aureus, which recently halved its ASML stake to 45,000 shares but remains overweight the stock. "It's a matter of valuation and positioning."

SHARES AT RECORD HIGHS

Demand and Capacity Challenges

With the stock near all-time highs, investors and analysts are debating how much further ASML, valued at 467 billion euros ($559 billion), can grow.

Its order backlog stands at 38.8 billion euros, but the giant chip-printing machines it sells can take a year to build. ASML is the only maker of EUV lithography systems, which are essential for creating the tiny circuitry of advanced chips.

Supporters point to the company's AI-driven outlook. Top customer TSMC plans major capacity expansions in 2026, with more expected in 2027 and 2028. Memory chip makers Samsung, SK Hynix and Micron also have AI-linked expansion plans that would benefit ASML.

"Although it may appear that the valuation ... is already very high, we're not relying on multiple expansion for a return," said ASML investor Gerrit Smit, lead portfolio manager of the Stonehage Fleming Global Best Ideas Equity fund.

He expects shipments to increase 15% annually through 2030.

"I'm not going to say they can charge anything for those machines, but that 15% growth is just unit growth. Along with that, they will gain in their own operational efficiencies with more capacity, and get better margins," said Smit.

HOW MUCH OF A PREMIUM IS ASML WORTH?

Degroof Petercam analyst Michael Roeg expects sector upgrades to slow.

"That could lead to some questioning the risk-reward of steep multiples," he said.

Investors see ASML and peers Applied Materials, Lam Research, KLA Corp and Tokyo Electron as a way to invest in rising chip demand without exposure to individual chipmakers.

ASML's ability to meet demand is a concern, with CEO Christophe Fouquet assuring analysts on Wednesday that his firm would not become a "bottleneck" for the sector.

JPMorgan analyst Sandeep Deshpande said ASML's valuation looked reasonable heading to 2027, given the AI investment cycle seems set to continue for several years. "We do not see a capacity issue," he said in a note on Thursday.

Jos Versteeg, an analyst at InsingerGilissen, said delays could hold up new chip facilities planned by the likes of TSMC and Samsung, as seen recently in the U.S. But he continues to recommend the stock for its long-term growth prospects.

"It's expensive. Yeah, if you think like that, you will never invest in ASML," he said. "I've seen so many clients who waited and never bought it – and they always regret it."

($1 = 0.8361 euros)

(Reporting by Toby Sterling and Nathan Vifflin. Editing by Adam Jourdan and Mark Potter)