One of the biggest losers as of today's evening session is farm & heavy construction machinery company ASML, whose shares are down -4.1%, underperforming the Nasdaq by -4.0%.
At $639.04, ASML is 16.05% below its average analyst target price of $761.19.
The average analyst rating for the stock is buy. ASML underperformed the S&P 500 by -4.0% so far today, but outpaced the index by 16.0% over the last year with a return of 10.0%.
ASML's trailing 12 month P/E ratio is 41.2, based on its trailing EPS of $15.52. The company has a forward P/E ratio of 26.1 according to its forward EPS of $24.5 -- which is an estimate of what its earnings will look like in the next quarter. The average trailing Price to Earnings (P/E) ratio of US-based technology companies is 27.16 as of first quarter of 2023. In contrast, the S&P 500 average is 15.97. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead).
We can take the price to earnings analysis one step further by dividing the P/E ratio by the company’s projected five-year growth rate, which gives us its Price to Earnings Growth, or PEG ratio. This ratio is important because it allows us to identify companies that have a low price to earnings ratio because of low growth expectations, or conversely, companies with high P/E ratios because growth is expected to take off.
ASML's PEG ratio of 1.1 indicates that its P/E ratio is fair compared to its projected earnings growth. In other words, the company’s valuation accurately reflects its estimated growth potential. The caveat, however, is that these growth estimates could turn out to be inaccurate.
An analysis of the company's gross profit margins can help us understand its long term profitability and market position. Gross profits are the company's revenue minus the cost of goods only, and unlike earnings, don't take into account taxes and overhead. Here's an overview of ASML's gross profit margin trends:
| Date Reported | Revenue ($ k) | Cost of Revenue ($ k) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-12-31 | 21,173,400 | 10,660,700 | 49.65 | -5.81 |
| 2021-12-31 | 18,611,000 | 8,802,000 | 52.71 | 8.39 |
| 2020-12-31 | 13,978,500 | 7,181,300 | 48.63 | 17.29 |
| 2019-12-31 | 11,820,000 | 6,919,900 | 41.46 | n/a |
- Average gross margin: 48.1%
- Average gross margin growth rate: 4.6%
- Coefficient of variability (lower numbers indicating more stability): 9.9%
We can see from the above that ASML's gross margins are very strong. Potential investors in the stock will want to determine what factors, if any, could derail this attractive growth story.
ASML's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to its operating cash flows minues its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | FreeCashFlow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-12-31 | 9,434,900 | -2,212,400 | 7,222,500 | -27.09 |
| 2021-12-31 | 10,845,800 | -940,300 | 9,905,500 | 173.12 |
| 2020-12-31 | 4,627,600 | -1,000,800 | 3,626,800 | 47.22 |
| 2019-12-31 | 3,655,100 | -1,191,500 | 2,463,600 | n/a |
- Average free cash flow: $5,804,600,000.00
- Average free cash flow growth rate: 30.9%
- Coefficient of variability (lower numbers indicating more stability): 58.6%
With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in ASML have received an annualized dividend yield of 0.9% on their capital.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts. As of the first quarter of 2023, the average P/B ratio for technology companies is 6.23. In contrast, the average P/B ratio of the S&P 500 is 2.95. ASML's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 1590, so it's likely that equity investors are over-valuing the company's assets.
As of first quarter of 2023, ASML is likely fairly valued because it has an inflated P/E ratio, an elevated P/B ratio, and an irregular stream of positive cash flows with an upwards trend. The stock has strong growth indicators because of its strong operating margins with a positive growth rate, and an inflated PEG ratio. We hope this analysis will inspire you to do your own research into ASML's fundamental values -- especially their trends over time.
