ASML: A Strategic Buy Amid Margin Headwinds and Long-Term AI Demand

ASML Holding NV (ASML) delivered a robust Q2 2025 performance, with record sales of €7.7 billion and EUV system bookings surging to €2.3 billion, yet its shares fell 6.5% in early trading on concerns about 2026 growth uncertainty. This disconnect between near-term margin pressures and long-term structural demand for advanced semiconductor equipment presents a compelling buying opportunity. With a backlog of €33 billion, analyst targets pointing to 18-45% upside, and valuation metrics suggesting undervaluation, ASML's dip is a chance to position for AI-driven growth.

Q2 2025: Strength Amid Headwinds

ASML's Q2 results underscored its dominance in EUV lithography, a critical technology for producing advanced AI chips. Gross margins held at 53.7%, slightly below Q1's 54.0%, due to tariff-related costs and shifting product mix. However, the installed base revenue (IBM) hit €2.1 billion, reflecting strong demand for upgrades and maintenance from existing customers. Net bookings of €5.5 billion, well above estimates, highlight a healthy order pipeline.

The company's cautious 2026 guidance—stemming from geopolitical risks and macroeconomic uncertainty—spooked investors. Yet, its 2025 outlook remains bullish: a 15% revenue growth target and a narrowed forecast of €32.5 billion in sales, up from €28.3 billion in 2024.

Margin Concerns vs. Long-Term Catalysts

The near-term margin pressures are real but temporary. U.S. tariffs on ASML's shipments and components are squeezing margins, particularly in H2 2025. Management expects Q3 gross margins to dip to 50-52%, down from 53.7%. However, these headwinds are offset by three long-term growth drivers:

1. AI's Insatiable Demand: Chipmakers are racing to build AI data centers, requiring EUV-enabled 3nm and 2nm nodes. ASML's High-NA EUV systems (EXE:5200B) are already shipping, with productivity gains of 60% over prior models.
2. Installed Base Growth: With over 500 EUV systems installed globally, IBM revenue—driven by upgrades and service contracts—is a recurring revenue engine. IBM sales rose to 27% of Q2 revenue, up from 23% in Q1.
3. Diversified Customer Base: Logic chipmakers (now 84% of bookings) dominate demand, but memory players are adopting EUV for advanced DRAM and HBM chips. China's reduced contribution (25-27% of sales vs. 41% in 2024) is offset by DUV sales for mature-node production.

Technical and Valuation Support

The technicals and valuation argue for a “buy on dips” strategy:

• Technicals: ASML's RSI of 47.7 (neutral) and a 5-day moving average of €76.40 suggest it's oversold. The 200-day MA at €78.80 offers support, while analysts like J.P. Morgan (target: €970) and Goldman Sachs (revised target: €910) reaffirm a Strong Buy stance.
  

• Valuation: At a forward P/E of 27.7X, ASML trades at a slight premium to peers like Lam Research (25.3X) but a discount to KLA (27.8X). Its EV/EBITDA of 25.7X is below its 5-year average of 28.6X, signaling undervaluation.

Risks and Why They're Manageable

• Geopolitical Risks: U.S.-China trade tensions remain a wildcard. However, ASML's strategy to source components from free trade zones and diversify customers (e.g., Taiwan, Korea, the U.S.) mitigates exposure.
• Tariff Costs: While near-term margins will take a hit, management is absorbing costs through automation and productivity gains. The long-term demand for EUV systems ensures pricing power.

Investment Thesis

ASML is a structural winner in the AI chip revolution. While tariffs and macro concerns may cause volatility, the company's backlog, technological leadership, and recurring IBM revenue provide a moat. Analysts' targets averaging €759 (10.85% upside) and as high as €970 (41.6% upside) suggest the market underestimates its long-term potential.

Action: Buy on dips below €750. The stock's YTD return of 15.7% lags peers like KLA (+46.7%), making it a relative bargain. Use the 50-day MA (€80) as a resistance level to scale into positions.

In a sector dominated by cyclical fears, ASML's fundamentals and valuation offer a rare blend of safety and growth. This is a stock to hold for the next decade of AI-driven semiconductors.