ASML STOCK RISK & REWARD ANALYSIS

Key Concepts

• ISML Stock Analysis: Focus on the historical price momentum and sentiment shifts of ISML stock.
• Value Investing: Strategy of buying stocks with good fundamentals during periods of negative sentiment or lower prices.
• Earnings Per Share (EPS): A measure of a company's profitability.
• Price-to-Earnings (P/E) Ratio: A valuation metric used to compare a company's share price to its EPS.
• Momentum Investing: Strategy that involves buying assets that have been performing well and selling those that have been performing poorly.
• AI Exuberance: Overly optimistic sentiment surrounding Artificial Intelligence related stocks.
• Semiconductor Cycle: Cyclical nature of the semiconductor industry, characterized by periods of high demand and supply shortages followed by downturns.
• Risk and Reward Analysis: Evaluating potential gains against potential losses in an investment.

ISML Stock: Risk and Reward Analysis

The analysis of ISML stock centers on its historical price momentum and sentiment fluctuations over a five-year period. The speaker observes a recurring pattern of positive momentum transitioning into negative sentiment, followed by a resurgence of positive momentum, similar to the situation observed two years prior. The core question posed is whether this current positive momentum will be sustained from a value investing standpoint.

Value Investing Perspective on ISML

From a value investing perspective, the strategy is to acquire stocks with strong fundamentals during periods of negative sentiment or when prices are at their lowest. The speaker previously advocated for ISML as a sole buy among the top 100 European stocks, even suggesting it outperformed the S&P 500. The principle is that when a stock with solid fundamentals is at a "rock bottom" price, the potential for significant loss is minimized.

Potential Upside and Valuation Scenarios

The potential upside for ISML is illustrated through hypothetical earnings and P/E ratio scenarios:

• Scenario 1 (Conservative): If ISML achieves €30 in earnings per share (EPS) over the next few years and maintains a P/E ratio of 30, the stock price could reach €900. This represents a 50% increase from a hypothetical €600 price point, considered a good return.
• Scenario 2 (Exuberant): In a scenario of market exuberance, with €40 EPS and a P/E ratio of 40, the stock price could reach €1,600, indicating a substantial return.

Currently trading around €900, the speaker believes there is "plenty of upside" with limited downside risk over time, though the timeframe for realizing this upside is uncertain.

Current Financial Performance and Outlook

ISML's earnings are reported as "going okay," with the company reiterating its guidance from its investor day. Despite some challenges in China, the company is expected to achieve an EPS of €20 in 2024, aligning with current guidance. If ISML can scale to €60 billion in sales, EPS could potentially reach €40, or somewhere in between, confirming the "tease" of future growth.

The outlook suggests that sales are not expected to decline due to lower demand from China. Over time, this situation is anticipated to improve, leading to higher sales.

Detailed Outlook and Key Risks

A more detailed outlook for 2026 is discussed, acknowledging that order linearity is not present, with orders arriving in a "lumpy way." It is considered "too early to talk about what this means to '27." The primary risk identified is the inability to predict future events, necessitating a thorough analysis of risk and reward.

At the current price of €900, ISML is estimated to yield a 6-7% return with "significant risk." This risk is amplified if projected scenarios do not materialize promptly or if there is a slowdown in AI or the broader semiconductor cycle. The speaker emphasizes that while the current ecosystem appears strong, investment success is fundamentally tied to price. The stock is now trading 50% higher than it was seven to eight months ago, resulting in lower potential returns and higher risk.

Investment Recommendation and Future Strategy

The speaker suggests that while ISML at €900 is likely to perform adequately, it is no longer a "buy" as it was at €600. The recommendation is to "start reducing position now." Personally, the speaker perceives "too much AI exuberance" and has witnessed the negative impact of a downturn in a semiconductor cycle.

The strategy for the future is to re-evaluate ISML from a value investing perspective when there is a "low long-term structural trend cycle risk or no risk." This approach prioritizes "low risk, high reward" and waiting for the "right opportunity," which the speaker aims to identify and share on the channel. The speaker anticipates potentially revisiting ISML around 2027 or 2032, depending on market conditions.