This year is a tough one for tech stocks. Even companies like Dutch-based ASML, Europe’s leading high-tech company and the world’s main supplier of machines for the semiconductor industry, have seen their share prices fall by more than 45 percent this year, despite record profits. For investors, these are not the times to be very courageous, because the really big risks have not yet been discounted.
Jan Longeval, leading investment strategist and Senior Advisor of Eurinvest Partners, said in an interview that major risks are not yet factored into the prices of most Western tech companies. “We are facing a new cold war,” he said. “This is a period when caution is called for.”
Randomness in the market
The problem for the tech sector in the short term, according to Longeval, is the fact that in the second phase of a stock market correction, when losses are deepening, there is less differentiation at the company level.
“A certain radicalism has crept into the selling of certain types of stocks, with investors ignoring the differences in underlying quality of the companies,” Longeval said. “In the case of the technology sector, too little attention is currently being paid to the distinction between individual companies. High tech is being dumped and companies like ASML are noticing it.”
But ASML›s downturn is not entirely unjustified either, said Longeval. “Any company in the free West that gets a large chunk of its profits from countries that form a geopolitical block against the US is running a very high risk. Much of the world has had enough of American economic, military and monetary hegemony and of liberal Western values,” he said, also referring to his outline of this trend in his 2020 book Heavy Metal.
New Cold War
According to Longeval, we are witnessing a new Cold War, a Clash of Civilisations. Russia’s military strategy in Ukraine, for example, is part of a Eurasian “master plan” that stretches from Europe to East Asia. “That means that Western companies that depend on trade with that region run the risk of being confiscated or having their market access taken away.”
ASML, which develops and sells high-quality, and strategic, technology to countries such as China, is no exception, according to Longeval. That kind of risk has not yet been factored into the prices of most companies.
Bloomberg reported earlier this week that the US is urging the Dutch State to force ASML to stop selling mainstream technology to China, in an attempt to thwart China’s plans to become the world leader in chip production. The technology in question - deep ultraviolet machines - are essential for making a large proportion of the world’s chips, and are therefore of strategic importance.
The major strategic interest conflicts between the West and a number of non-Western countries in the world mean that investors should be very selective, said Longeval.
ASML still attractive
Jim Tehupuring, owner of 1Vermogensbeheer, also sees the risks that a rift between the West and the rest of the world would entail.
“If you believe there will be a long-term geopolitical conflict between the West and the rest, you should not invest in Dutch companies that do business with China. ASML›s turnover in Europe is almost zero, so that is risky. You also have to ask yourself whether the chip industry as a whole will continue to grow as fast as we previously thought,” he said.
Those risks, Tehupuring said, are already incorporated in the share price. ASML›s valuation has rightly been lowered by interest rates, but it is still very favourable, he said. “We are seeing a major shift of power towards China. That will happen gradually and over a long period of time. But, purely on the basis of the earnings figures and the market position on a three-year horizon, ASML is one of the most attractively valued companies,” concluded Tehupuring.
ASML shares the malaise
Degroof Petercam analyst Michael Roeg said the Bloomberg report is «old news». But if it does come to a ban, which he doubts, ASML will simply sell the technology to someone else. Still, China alone accounts for 16 percent of ASML›s revenue with the sale of this equipment. However, the most expensive machines only go to Korea, Taiwan and the US.
Degroof Petercam maintains unchanged its buy recommendation for ASML, with a target price of 760.00 euro. The share was yesterday, with a profit of over 3 percent, at 421 euros. On 16 November 2021 the all time high was reached: 765.50 euros per share.
This article first appeared in Dutch on InvestmentOfficer.nl.