S&P 500 Index Fund: Don’t Miss This Top Semiconductor Stock

Investing in the stock market can be effectively achieved by purchasing an S&P 500 index fund. This approach guarantees a well-diversified portfolio, ensuring that you own a portion of the market’s leading performers. Given that only a select few companies generate the majority of total annual returns for the index, it is crucial to invest in those high-performing stocks to secure favorable returns on your investments.

Over the past two years, artificial intelligence (AI) stocks have emerged as the dominant force in the stock market. Notable companies such as Nvidia, Apple, and Meta have significantly contributed to the returns of the S&P 500 in 2024. If you hold an S&P 500 index fund, you are indirectly investing in a considerable portion of these leading mega-cap stocks.

Nonetheless, it is crucial to note that the S&P 500 does not encompass every company reaping benefits from the surge in artificial intelligence spending. The index exclusively includes consistently profitable companies based in the United States. Consequently, investors who focus solely on an S&P 500 index fund may inadvertently overlook some of the most promising investment opportunities.

Since the S&P 500 is comprised entirely of U.S. companies, index investors might miss out on a significant player that is vital to the advancement of AI technology. The Dutch company ASML (ASML 2.18%) does not qualify for the S&P 500, but its importance in the semiconductor industry cannot be underestimated. The good news is that now is still an opportune time to consider acquiring shares of this company.

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Critical Role of ASML in the AI Revolution

ASML does not manufacture semiconductors directly; instead, it supplies essential machinery that empowers foundries to optimize their limited resources effectively. The company specializes in selling cutting-edge semiconductor lithography machines, particularly deep ultraviolet (DUV) and extreme ultraviolet (EUV) machines. These advanced machines enable foundries to print intricate chip patterns on silicon wafers with remarkably low error rates, which is crucial for the production of high-performance chips.

ASML stands as the sole producer of EUV machines, which are indispensable for fabricating the most sophisticated AI chips. As major tech companies expand their data centers to focus on training and deploying generative AI models, they face numerous challenges, particularly regarding space and energy consumption. Enhanced efficiency in chip design can help alleviate these issues, but developing the most powerful and energy-efficient chips requires the innovative machinery offered by ASML.

The long-term prospects for ASML are exceedingly positive. The management anticipates that semiconductor sales for data centers will soar to approximately $350 billion by 2030, fueled by the escalating investments in AI technologies. Overall, semiconductor sales might exceed $1 trillion by that same year, indicating a robust average annual growth rate of 9% through the end of the decade.

Importantly, ASML is positioned to outpace the overall semiconductor market growth. This is primarily due to the absence of significant competitors for its cutting-edge machines. Additionally, ASML’s established relationships with the world’s leading foundries are unlikely to change, as it typically takes years to plan for and implement new machinery. Existing machines have an impressive lifespan of 20 to 30 years, ensuring ASML’s continued presence in top foundry facilities for the foreseeable future.

Furthermore, ASML’s EUV machines are inherently more complex than its DUV counterparts. As a result, the company is likely to see increased revenue from servicing its machines in the years to come, which could lead to enhanced gross margins in the long run.

Discovering Exceptional Value in the AI Sector with ASML

ASML has faced a downturn in the latter half of 2024, as it continues to recover from the sales slowdown experienced in late 2022. Management has revised its revenue expectations for 2025 to a range of 30 billion euros to 35 billion euros ($31.1 billion to $36.3 billion), which falls within the lower end of its previous projections shared during the 2022 analyst day. Additionally, it has adjusted its gross margin forecasts for next year to between 51% and 53%.

For investors willing to recognize ASML’s long-term potential, this may represent a rare opportunity to acquire an undervalued asset. As previously mentioned, ASML is expected to surpass the 9% growth rate in semiconductor spending due to its robust competitive standing. With anticipated low double-digit revenue growth, combined with significant operating leverage from increased EUV sales and service revenue, substantial growth in operating profits is projected over the next five years.

Management estimates operating income of approximately 22.1 billion euros ($22.9 billion) at the midpoint of its 2030 outlook, a significant increase from the 8.8 billion euros ($9.1 billion) expected this year. This indicates an impressive average compound annual growth rate of around 17% leading up to the end of the decade.

Currently, shares of ASML are trading at about 30 times analysts’ consensus earnings estimate for 2025. While this valuation may seem high given the conservative expectations for that year, investors who recognize ASML’s long-term potential, as semiconductor sales are expected to grow throughout the decade, may find the true value of the stock to be much higher.

If you have been committed to an S&P 500 index fund, it may be worthwhile to consider adding a small allocation to ASML. If ASML were part of the index, it would comprise approximately 0.5% of the total weighting. This could serve as a strategic starting point for diversifying your investments.

Even for those not invested in an index fund, ASML warrants a closer examination. It has the potential to be a valuable addition to any investment portfolio.