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Investing in the Stock Market: The Case for S&P 500 Index Funds

One of the most effective strategies for investing in the stock market is to purchase an S&P 500 index fund. By choosing an index fund, you ensure that your investment is diversified, which means you’ll own a small piece of many of the market’s biggest success stories. Given that only a select handful of companies typically drive the majority of total returns for the index each year, holding shares in those leading firms is essential for achieving strong returns.

The Dominance of AI Stocks

In recent years, artificial intelligence (AI) stocks have taken the spotlight as some of the most profitable actors in the stock market. Companies such as Nvidia, Apple, and Meta have emerged as significant contributors to the S&P 500’s performance through 2024. If you’ve invested in an S&P 500 index fund, you are likely benefiting from having shares in these giant tech firms.

The Limitations of the S&P 500 Index

However, while the S&P 500 index does include many of the market’s heavyweights, it does not cover every company that is reaping the rewards of increased investment in AI. The index comprises only consistently profitable companies based in the United States, which means that investors who rely solely on an S&P 500 index fund may miss crucial opportunities for growth that other companies might present.

Overlooked Opportunities Beyond U.S. Borders

An important aspect to consider is that the S&P 500 does not factor in non-U.S. companies benefiting from the AI boom. A prime example is the Dutch firm ASML (NASDAQ: ASML), which plays a crucial role in the advancement of AI but is not part of the S&P 500. Despite this, ASML is a key player in the semiconductor manufacturing process, and it isn’t too late to invest in this promising company.

ASML’s Contribution to AI Technology

ASML does not produce semiconductors directly; rather, it manufactures the essential machinery that enables foundries to optimize their limited resources. Specifically, ASML is known for providing semiconductor lithography equipment, including deep ultraviolet (DUV) and extreme ultraviolet (EUV) machines. These machines are used to print precise chip patterns onto silicon wafers with remarkable accuracy.

The Unique Position of ASML

ASML is the only manufacturer of EUV machines, which are vital for creating some of the most advanced AI chips on the market. As tech giants expand their data centers for training and running generative AI models, considerations like space and energy consumption become increasingly critical. More efficient chips help mitigate these issues, but producing powerful and energy-efficient chips necessitates the use of ASML’s sophisticated equipment.

A Bright Future Ahead for ASML

Looking long-term, ASML is well-positioned for significant growth. Company leadership forecasts that semiconductor sales targeted for data centers could skyrocket to $350 billion by 2030, driven largely by heightened investment in AI technology. Overall semiconductor sales could surpass $1 trillion in the same timeframe, indicating a robust 9% average annual growth rate through the end of the decade.

The Competitive Advantage of ASML

Crucially, ASML’s growth outlook may exceed the projections for the overall semiconductor industry. This expectation largely stems from the absence of genuine competitors in the manufacturing of its machines. Additionally, ASML’s established relationships with the world’s premier foundries are likely to remain stable. Due to the extensive planning required for new machinery and the long lifespan of existing machines—ranging from 20 to 30 years—ASML’s dominance among leading foundry facilities is set to continue.

Revenue Growth and Profitability

Moreover, ASML’s EUV machines offer higher complexity compared to its DUV counterparts, which will likely result in increased revenue from servicing these advanced machines. This trend could also contribute to expanding gross margins over the long run.

Short-term Challenges: A Bump in the Road

Despite this strong outlook, ASML has faced challenges in the latter half of 2024 as it continues to adjust from a sales slowdown in the second half of 2022. Management has revised its revenue guidance for 2025, now projecting between 30 billion euros and 35 billion euros (approximately $31.1 billion to $36.3 billion), which falls short of earlier forecasts. Gross margin expectations have also been adjusted to between 51% and 53%.

Long-term Investors Take Note

Astute investors who recognize the long-term potential of ASML might find themselves in an advantageous position by considering this stock. ASML is set to outpace the expected growth in semiconductor spending, thanks in part to its competitive edge. Low double-digit revenue growth, combined with substantial operating leverage from increased EUV machine sales and service income, could lead to considerable advances in operating profits over the coming five years.

Forecasting Future Earnings

Management anticipates that operating income could reach around 22.1 billion euros (approximately $22.9 billion) by the midpoint of its 2030 forecast, up from projected earnings of 8.8 billion euros (about $9.1 billion) this year. This represents a compound annual growth rate of approximately 17%.

Valuation and Investment Strategy

Currently, ASML shares are trading at around 30 times analysts’ consensus earning estimates for 2025. This valuation might seem high given the subdued expectations for the upcoming year; however, savvy investors who view the long-term potential of ASML as semiconductor sales evolve over the decade may recognize significant value in the stock.

Diversifying Your Portfolio

If you are currently invested in an S&P 500 index fund, adding a modest amount of ASML could be beneficial. If ASML were part of the index, it would account for approximately 0.5% of your holdings—a thoughtful starting point for diversification.

Additionally, even if you are not an index investor, taking a closer look at ASML could yield attractive opportunities for your overall portfolio.

Do Your Research Before Investing

Before deciding to invest in ASML shares, it’s crucial to conduct thorough research. The Motley Fool Stock Advisor analyst team recently identified their selection of the 10 best stocks for investors to buy now, and ASML did not make the list. The selected stocks hold the potential to deliver impressive returns over the coming years.

Leverage AI legalese decoder for Informed Decisions

In today’s complex investment landscape, using tools like the AI legalese decoder can empower you to make well-informed decisions. This innovative platform helps decode financial and legal jargon, ensuring you fully understand the implications of your investment choices. By simplifying legalese, it enables you to navigate through complex investment documents and industry regulations with confidence.

Achieving Financial Success with Informed Choices

Investing in the stock market, and particularly in AI stocks like ASML, can have a profound impact on your portfolio’s growth. As the landscape evolves, combining sound investment strategies with tools such as AI legalese decoder will not only enhance your understanding but also help you seize lucrative opportunities.

Take control of your investments today, and don’t miss out on the potential of transformative companies like ASML to elevate your financial future.

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