Mizuho is Optimistic About This Underperforming Chip Stock

Mizuho analysts have shifted their preferred semiconductor stock from TSMC to ASML, citing an attractive risk-reward scenario, as ASML has underperformed its competitors.

In a recent note, Mizuho pointed out that while TSMC shares rose by 16% in September, ASML only saw a modest increase of 0.8% during the same timeframe. As a result, the analysts now consider ASML their top pick for year-end gains, recommending it as a promising long-term investment.

One analyst remarked, “ASML is my new favorite semiconductor stock heading into year-end,” emphasizing the stock’s subpar performance relative to the broader semiconductor market and key players, including Nvidia and TSMC. They find a “compelling risk-reward with limited downside” for the stock.

The report indicated that ASML’s market sentiment has been negatively impacted by worries over Intel’s capital expenditure reductions and potential risks stemming from China restrictions. However, Mizuho views this sentiment as a buying opportunity, with much of the negativity already reflected in ASML’s stock price.

Looking ahead, Mizuho anticipates stable third-quarter results for ASML in October and regards the company’s upcoming investor day on November 14 as a significant event. They expect ASML management to maintain its long-term revenue targets for 2025, projected between €30-40 billion.

A Mizuho analyst noted, “I sense that buyers now expect €32-33 billion at best,” implying that even slight cuts to estimates could pave the way for a market rally.

Furthermore, Mizuho believes ASML is well-situated for a rebound in lithography tool spending and forecasts that the company’s valuation could return to a forward P/E range of 30-32. With EPS estimates for 2024 already declining, Mizuho sees limited downside risk and considerable upside potential, suggesting that ASML’s valuation could recover to a more favorable P/E range compared to the current compressed levels.