Across the pond, tech stocks have pulled back, with the futuristic Nasdaq index falling 7% since July. And I think there could be one perfect artificial intelligence (AI) stock to buy for my portfolio to try and take advantage of the dip.
A technology in high demand
It’s just been announced that ChatGPT will soon be able to talk (literally) about current affairs after an update. Other AI-powered chatbots, such as Google’s Bard, already do so. But generating convincing human-like responses to user queries requires massive amounts of computing power.
That means more need for AI chips designed by the likes of Nvidia. But it also means additional long-term demand for the highly complex machines manufactured by Dutch firm ASML (NASDAQ: ASML).
These huge systems allow chip makers to burn complex patterns of transistor circuitry onto the surface of silicon wafers. This process is called lithography and ASML is dominant in this area.
Its most advanced equipment, which uses extreme ultraviolet (EUV) light, help make the cutting-edge chips that power data centres and, in turn, ChatGPT. Only ASML manufactures these.
Last year, it reported €21.2bn in sales and €5.6bn in net income. It boasts a gross margin of 50% and currently has an order backlog of €38bn.
The price tag for ASML’s next machine, the High-NA EUV, is expected to be around $300m per unit. The first system should be shipped before 2024, with Intel expected to be the alpha customer.
In the eye of the geopolitical storm
Now, the main risk here is that ASML’s critical technology is at the centre of an ongoing geopolitical battle between the US and China. You see, advanced chips aren’t just found in laptops and iPhones, but also state-of-the-art weaponry. And the US isn’t too keen on China developing lots of that.
This is why ASML is already prohibited from selling its EUV equipment in China, but it does sell its older deep ultraviolet (DUV) lithography systems there. And this market accounts for around 20% of overall revenue.
If the firm is also restricted from selling its DUV equipment to Chinese chip-making customers, then growth could be hampered. The share price could take a hit in this scenario.
That said, the stock is already down 33% in two years, so I expect some of this risk is already priced in.
I’m still buying
Last year [2021], the chip industry produced more transistors than the combined quantity of all goods produced by all other companies, in all other industries, in all human history. Nothing else comes close.
Chris Miller, Chip War: The Fight for the World’s Most Critical Technology
Whether we’re talking about virtual reality, driveress cars, missile systems, or the latest smartphone, all need cutting-edge semiconductors. So do solar panels and wind turbines, which should underpin massive long-term demand for the company’s equipment from established chip makers.
That’s why many tech investors argue that ASML is probably the most important company in the world. It’s hard to disagree, I feel.
So what price to pay for the shares of such a supreme enterprise? Well, they’re currently trading on a forward-looking price-to-earnings (P/E) multiple of 25.
For a company whose technology is enabling the AI revolution, I reckon that’s a fair price to pay. And I’m ready to add to my holding in October.
