This Less-Hyped Tech Stock Could Be the Key to the Next AI Wave

Key Points

• ASML is seeing rising demand for its EUV lithography machines as AI chipmakers begin ordering equipment for next-generation production.
• The company’s strong backlog and lower capital expenditures suggest improving margins and higher earnings could be coming soon.
• Analyst targets are moving higher and short interest is falling, signaling growing investor confidence in the stock’s long-term potential.

With extreme ultraviolet (EUV) demand starting to come into the artificial intelligence (AI) deal cycle, investors can stop worrying about whether this will be a short-term spike in the tech trade. Shares of ASML Holding NASDAQ: ASML are rallying just over 2% following its latest quarterly earnings report, signaling growing confidence in the technology sector’s long-term upside.

As companies like NVIDIA Corp. NASDAQ: NVDA expand their chip and semiconductor distribution routes, partnering with players like OpenAI and Advanced Micro Devices Inc. NASDAQ: AMD, investor focus remains squarely on AI-powered end products. However, these advances rely heavily on the lithography equipment that enables next-gen chip production—ASML’s specialty.

While ASML doesn’t attract the same attention as front-line tech names, it does underpin the entire semiconductor value chain. For patient investors with a longer time horizon, the setup offers compelling potential.

Why ASML’s Premium Valuation Signals Opportunity

Most investors are taught to be wary of “expensive” names. Yet in some cases, a premium price tag reflects future growth that's not yet visible in headline numbers. In the case of ASML, its price-to-book (P/B) ratio of 19.8x, compared to the computer sector’s average of 7.8x today, indicates a clear premium.

The reason for this premium can be found in the company’s Q2 quarterly earnings, which show strong forward-looking metrics. Despite revenue growth of less than 1% this quarter—a figure that might initially raise concern—ASML secured €5.4 billion (approx. $6.3 billion) in net bookings, including €3.6 billion (approx. $4.2 billion) from EUV machines alone.

With AI chip demand climbing, the lithography equipment enabling advanced node production will become increasingly essential. Much of this backlog is likely to convert to revenue in the upcoming quarter, suggesting an inflection point is near.

Margin Pressure Easing Could Boost EPS

ASML reported gross profit margins of 51.6% compared to 53.7% during the previous quarter. This came along with a decrease in capital expenditures, which were €295.9 million (approx. $345 million), compared to €415 million (approx. $484 million) for the same quarter last year. What this means for investors is potential earnings per share (EPS) expansion for the next quarter.

The semiconductor equipment industry typically has two phases: heavy capex ahead of order fulfillment, followed by revenue booking and margin recovery. ASML appears to be moving into this second phase, meaning margins could recover above the previous 53.7% mark on gross and trickle down all the way to net earnings.

A word of caution from management: the tempered outlook for Chinese demand in 2026. However, as technology names in China continue to rally this quarter on the back of AI and chipmaking activity, this outlook may be a conservative view from management to position ASML for a potential beat above expectations.

Analyst Targets and Market Sentiment Show Upside Ahead

The analyst consensus price target is set at $1,052 for ASML stock, which is just about fair value.

However, there are some outliers, such as Susquehanna's Mehdi Hosseini, who has issued a $1,150 price target, calling for 14% additional upside—two days before ASML's earnings release. This means that the price target may soon be revised higher in response to the new results, either from this analyst or others. 

All told, the market’s positive reaction to the stock was accompanied by some signs of bearish capitulation, as short interest in ASML declined by 16.7% over the past month, indicating that potential buyers are gaining ground on bears.

The bottom line is that with no signs of weakening chip demand, ASML could still have room to run. The company could very well reach a new 52-week high—as long as investors have the patience to hold on for further EUV demand, which is likely to show up in a quarter or two.