If you stuck with the semiconductors through 2025, you’re sitting on a market-beating gain on the year, with the VanEck Semiconductor ETF (NASDAQ:SMH | SMH Price Prediction) now sitting up just over 48% for 2025.
Undoubtedly, if you panicked over Dr. Michael Burry (the brilliant doctor who made a fortune betting against the housing market ahead of the Great Financial Crisis) and his bearish views of AI and the semiconductor scene in general, you might have missed out on the run.
The semiconductor stocks might be coming in hot, but there may still be more upside in the new year
Though 2026 might be the year that the semiconductors give back the gains (and perhaps then some, especially if Burry is right about AI being in a bubble), I certainly wouldn’t buy put options or go short any of the names, given the dynamics in play and the big changes that could be in the cards for the firms spending so much on the revolutionary technology.
While the stakes are higher with the broad basket of semiconductor plays, especially given their history of cyclical booms and busts, and the likelihood the possibility that AI is closer to a big correction (or even something a bit worse), I wouldn’t be against sticking with the names that go for a relatively attractive valuation.
Of course, the semiconductor plays tend to move together (the same goes for all other AI plays), but I do think that some names stand out on a relative basis. And in this piece, we’ll check in on one top semi pick from a smart analyst over at TD Cowen.
ASML: A relative value play in semis
Consider shares of the European EUV lithography equipment maker ASML (NASDAQ:ASML), which stands out as one of Bank of America’s most enticing top picks for the new year. Given ASML is pretty much the only game in town as far as high-end lithography machines go, the stock stands out as an essential semi equipment play for semi investors to consider, especially those that are heavier on the more obvious plays in the space (think the GPU makers).
In any case, shares remain quite cheap going into the new year despite finishing 2025 with a colossal 53% gain. The stock currently goes for just over 34 times forward price-to-earnings (P/E), which, while on the expensive side of the historical range, still doesn’t seem too excessive, especially considering the potential catalysts on the horizon.
With a $1,331 price target on the stock and expectations of an improved path forward, especially after the late-2024 and early-2025 slump, ASML stock certainly looks to be a tempting breakout play at this juncture, especially if the AI trade is ready to pick up more traction in 2026. Add company-specific efforts that could beef up margins as demand marches higher, and it’s tough to get in the way of the name, which continues to sport one of the widest economic moats in the semi scene.
What about the risk of Chinese competition?
Of course, there is some concern that China might be able to get through ASML’s moat as it looks to build its own EUV machines via some sort of reverse engineering. Indeed, it’s China’s aim to lessen its dependence on foreign firms when it comes to all things AI (chips, equipment, and all the sort), but I think it’s far too early in the game to conclude that China has eroded ASML’s moat, especially since the technology doesn’t yet have the same slate of features to produce the next generation of cutting-edge chips.
Sure, it’s one thing to generate EUV light, but it’s another thing to get other critical parts of the equipment right. Though the development is worth keeping tabs on, I certainly wouldn’t count ASML out of the game just yet.
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