October 22, 2024
1. Summary
ASML is the world's only manufacturer of extreme ultraviolet (EUV) lithography machines , an essential technology for the production of advanced microchips.
Industry leaders , chipmakers such as TSMC, Samsung and Intel rely on ASML's advanced technology to remain competitive, forcing them to purchase its latest generation machines.
A technological monopoly that is valued at € 260 billion
A company with high growth, ROIC of 60% and net cash (no debt)
Headquarters in Eindhoven, Netherlands
2. Current situation
The company has fallen by more than 30% on the stock market since its peak, going from €1,000 to €660 per share, due to negative forecasts for 2025 linked to a reduction in new orders.
Total sales are expected to reach between 30 and 35 billion euros next year, which is below analysts' forecasts.
Advanced chips needed for artificial intelligence (AI) are performing well, but those for electric cars are underperforming.
A gradual economic recovery is expected, generating caution among customers.
At the current price of €660 per share, the company is at a price over earnings (PER) of 27x, below its average of 30x, a correct PER for a high-quality company, with leadership in the industry.
Since there are no other EUV lithography machine manufacturers with ASML’s level of expertise and technology, the company occupies a strategic and near-monopolistic position in the manufacturing of advanced microchips. Once chip demand recovers, the company will be uniquely positioned to supply key industry players such as TSMC, Samsung and Intel , who rely on ASML ’s technology for the production of cutting-edge microchips, which are increasingly essential in virtually every device ( mobile phones, computers, automobiles, televisions, watches, sensors, audio, medical equipment, measurement, aerospace, etc.) .
With a monopoly on EUV technology , essential for producing advanced chips, ASML has a key strategic position in the supply chain.
3. ASML's business
ASML (Advanced Semiconductor Materials Lithography) is a Dutch company that plays a key role in the semiconductor industry, as it manufactures lithography machines that are crucial for chip production. Lithography is the process by which integrated circuits are printed on silicon wafers to form the chips found in electronic devices such as phones, computers, cars, etc.
ASML's lithography technology is used by major chipmakers such as TSMC, Samsung and Intel to produce ever smaller and more powerful chips, with more transistors per unit area.
ASML is particularly famous for developing and selling extreme ultraviolet (EUV) lithography machines, which are the most advanced in the world. These machines enable the creation of circuits on chips at nanoscales, which is essential for further reducing the size of transistors and increasing the power and efficiency of chips.
Extreme Ultraviolet Lithography (EVL)
In EUV lithography, extreme ultraviolet light with a wavelength of 13.5 nanometers (very short compared to traditional ultraviolet light, which has longer wavelengths) is used. This light is produced by plasma bursts generated by firing a high-power laser at a drop of tin, which releases EUV light.
Extreme ultraviolet light is directed through a series of high-precision mirrors inside the machine, which guide the light onto a mask . The mask contains the circuit design, and this pattern is projected onto a silicon wafer, transferring the design in the form of extremely thin circuits.
Microchips
EUV lithography is critical for the manufacturing of advanced chips with smaller technology nodes, such as 7nm, 5nm, 3nm , and in the future, 2nm . As transistors get smaller, chips become faster, more power-efficient, and more powerful, driving the development of technologies such as artificial intelligence, 5G, autonomous vehicles , and IoT devices .
ASML's new machine called High NA in 2024 further reduces the print size (a machine that makes 2nm chips is expected by 2025)
Who is involved in the chip manufacturing process?
Within the semiconductor chain, there are multiple players that perform different functions. This diagram shows a cluster of specialized companies, each in a specific part of the chain, from the software needed for the design to the actual manufacturing of the semiconductors:
Machinery and equipment manufacturing: Companies that manufacture machinery and equipment for microchip production, such as ASML
Software: Software companies for microchip design, this is the case of Synopsys or Cadence
Design: Companies that only focus on microchip design , such as Nvidia , AMD or Qualcomm
Microchip manufacturers: Finally, there are companies that manufacture microchips , such as TSMC , Intel, Samsung. TSMC (Taiwan Semiconductor Manufacturing Company) manufactures 92% of the 5nm and currently 4nm chips in the world.
4. How does ASML generate its revenue?
ASML’s revenue comes primarily from the sale of its lithography machines, with a large portion driven by its high-end EUV machines. Below are the sales by percentage that represent its main sources of revenue:
1. Sales of lithography machines (about 80% of total revenue):
EUV Machines : Approximately 50% - 60% of ASML’s total revenue comes from the sale of its EUV lithography machines. These are the most expensive and advanced, so they account for the majority of sales. DUV Machines : Between 20% - 30% of revenue comes from the sale of DUV machines, (these machines use argon fluoride (ArF) excimer laser technology) which remain in high demand for more conventional chip production.
2. Maintenance and upgrade services (around 10% - 15% of revenue):
ASML generates a significant portion of its revenue through maintenance contracts, technical support and the sale of upgrades for already installed machines. These services are crucial for semiconductor factories to maintain their production at optimal levels.
3. Software, metrology and inspection tools (around 5% - 10% of revenue):
ASML also sells advanced software and metrology and inspection tools to improve efficiency and accuracy in the chip manufacturing process. Although it is not the largest source of revenue, it is still a relevant part of the business.
Desglose de las ventas por maquinas y servicios
Nearly 80% of its total income comes from the sale of lithographic machines.
Breakdown of sales by technology
Most of its sales come from its NXE machines that use extreme ultraviolet light.
Sales by geographic region
*TSMC (Taiwan Semiconductor Manufacturing Company) is one of its main customers - Taiwan.
5. Numbers overview
The company's sales have increased from 5,856 million in 2014 to 27,558 million euros in 2023, a 10-year period, CAGR of 18%
By 2024, the company is expected to end up with total sales of 28 billion euros, very close to 2023.
Forecasts for 2025 are around 32.5 billion euros
Operating margins (EBIT) of 32%
Earnings per share (EPS) growing from $3.23 to $19.89 over 10 years (22% CAGR)
ROIC of 60%
Net debt/EBITDA of (0.03x), the company has a net cash position of € 292 million
A total of 393 million shares outstanding
Capitalizes 262 billion euros
Sales have grown steadily, with a sharp increase over the past three years from €18,611 million to €27,558 million, a CAGR of 25%. Over the past 10 years, ASML has achieved a compound annual growth rate of 18%.
The company has increased operating margins from 26% to 33%, which indicates a strong market positioning and competitive advantage.
Earnings per share (EPS) have been growing faster than sales. Currently, EPS is $3.60. EPS is forecast to reach $4 by 2025.
The ROIC with Goodwill is high, around 60%-70% including acquisitions. ASML spends very little money on acquisitions which helps achieve high ROIC levels.
The company has net cash totalling 2 billion euros and a cash flow of 5.4 billion euros, which it uses to buy back shares, pay dividends and maintain plants and equipment.
4. Competitive advantages (MOAT)
ASML possesses a number of key competitive advantages that position it as a dominant player in the semiconductor industry, especially in the manufacturing of lithography machinery for chip production. These advantages have allowed the company to maintain its global leadership and secure a virtually irreplaceable position in the advanced technology supply chain. Below, I will outline ASML's key competitive advantages.
4.1. Monopoly in EUV (Extreme Ultraviolet) technology
ASML is the only company in the world that produces EUV lithography machines, which are necessary to manufacture advanced chips at nanoscales. No other competitor has been able to develop or commercialize this technology, giving ASML a monopoly on manufacturing smaller, more efficient and more powerful chips. Semiconductor manufacturers such as TSMC, Samsung and Intel rely entirely on ASML to produce their most advanced chips.
4.2. High technological entry barrier
EUV lithography technology is extremely complex and requires specialized knowledge in various disciplines such as optics, quantum physics, precision engineering and advanced software. Creating a single EUV machine involves collaboration with several global suppliers and significant investment in research and development. These high technological barriers make it difficult for other competitors to enter the market.
4.3. Economies of scale and network effects
ASML has achieved considerable scale in the production of lithography machines, allowing it to optimize costs and improve its efficiency compared to potential competitors. In addition, its customer network includes the world's largest chip manufacturers, such as TSMC (Taiwan), Samsung (South Korea) and Intel (United States), which already depend on its products and services, reinforcing its dominant position and facilitating long-term relationships.
4.4. Continuous innovation and leadership in R&D
ASML invests heavily in research and development (R&D), staying at the forefront of technological innovation. This allows it to not only continuously improve its EUV machines, but also to develop new technologies, such as future generations of high NA (Numerical Aperture) machines, which will enable even more advanced and smaller chips to be manufactured. This investment in R&D ensures that ASML remains a leader in the industry in the future.
4.5. After-sales services and customer relations
ASML not only sells machines, but also offers maintenance, technical support and upgrades, creating a long-term and dependent relationship with its customers. These long-term relationships allow ASML to generate recurring revenues, through maintenance contracts and technological upgrades, further consolidating its position in the industry.
4.6. Robust supply chain and strategic partners
To develop its machines, ASML has built a solid supply chain and relies on a network of highly specialized strategic partners, such as Carl Zeiss (in precision optics), who provide key components for EUV machines. This supplier ecosystem is difficult to replicate, and reinforces its leadership in the manufacture of lithography equipment.
4.7. Geographic diversification and global exposure
ASML has a global clientele, allowing it to diversify its revenue and reduce its dependence on any particular region or client. Its presence in key markets such as Taiwan, South Korea, the United States and Europe ensures that it is well positioned in the face of changes in demand or geopolitical issues, such as trade tensions between China and the United States.
4.8. Moore's Law and increasing demand for advanced chips
The advancement of chip miniaturisation (driven by Moore’s Law) and the growing demand for semiconductors for emerging technologies such as artificial intelligence, 5G, electric vehicles and IoT devices, ensure that ASML remains a crucial player for semiconductor manufacturers looking to stay at the forefront of the industry.
4.9. Patent protection
ASML has an extensive patent portfolio that protects its innovative technology, making it difficult for other players to copy or replicate its advances in lithography. This intellectual protection gives it a legal and competitive advantage over potential competitors.
4. 10. Ability to adjust to global regulation
ASML has also proven capable of adjusting to changes in global regulation, such as restrictions on the export of its most advanced machines to certain markets, such as China, while continuing to diversify its sales in other key markets, maintaining a strategic position in the face of geopolitical challenges.
5. Management team
ASML’s management team is characterized by its focus on continuous innovation and investment in R&D. Under its leadership, ASML has achieved disruptive technological advances and established key strategic relationships with the world’s largest semiconductor manufacturers. The emphasis on collaboration with customers and suppliers is another key aspect of ASML’s management, reinforcing its leading position in the industry.
ASML's management is comprised of professionals with both technical and financial experience, who have played a key role in making the company the world leader in lithography for advanced chip production.
Peter Wennink – CEO and Chairman of the Executive Board
Peter Wennink has been the CEO of ASML since 2013 and has been with the company since 1999. Under his leadership, ASML has grown exponentially and established itself as a leader in EUV lithography technology. With a strong background in accounting and finance, Wennink previously served as ASML’s CFO, allowing him to have a strategic focus on both operations and company expansion. He is a key figure in ASML’s relationship with major chipmakers such as TSMC, Samsung and Intel.
Peter Wennink owns 39,300 shares of the company out of 393 million shares outstanding (0.01% of the company), which is worth about €26 million.
In 2023, his salary after bonuses was 5.941 billion, he owns 4x in shares compared to his salary, a discreet alignment but it is usually normal in companies of this size.
Roger Dassen – CFO and Member of the Executive Board
Roger Dassen has been ASML’s CFO since 2018. Prior to joining ASML, Dassen was a Global Audit Partner at Deloitte and also held the position of Audit Professor at Maastricht University. His background in finance and audit brings a strong financial and control perspective to ASML, overseeing all financial activities of the company in its global expansion.
Martin van den Brink – President and CTO
Martin van den Brink is the company’s Chief Technology Officer (CTO) and President. He was one of the original members of ASML from its early years in the 1980s. He has been a driving force in the development of DUV and EUV lithography technology, being instrumental in the technological advances that have allowed ASML to remain at the forefront of semiconductor manufacturing innovation. His technical insight is critical to the development of future generations of lithography systems.
Remuneration
Number of shares owned by ASML CEO
6. ASML valuation and target price
To value the company, I will consider three possible scenarios, which will allow me to estimate different future situations and their impacts on the value of the company. This approach provides a more complete and flexible view of the different paths the business could take.
Conservative: Moderate growth, margins close to current ones and an economic environment similar to the current one with a downward trend in interest rates but geopolitical tensions
Optimistic: Higher than normal growth due to an economic recovery, low interest rates, margin expansion 2 points higher than current, and a less tense geopolitical situation
Pessimistic: Growth slows, geopolitical situation worsens in countries in conflict (Russia-Ukraine, Israel-Palestine), tension in Taiwan, economic slowdown, and slight rise in interest rates.
The general situation is as follows:
The company has been growing at an average rate of 18% over the last 10 years, 30% in the last year, 2023, and in the current year 2024 sales will grow by a modest 2%, so I will be conservative and estimate a growth of around 15% for the coming years (according to the company's own estimates) and thus determine the valuation.
The company's historical valuation is around PER 30x and EV/EBITDA 23x.
It is currently valued at 28x PER and 22x EV/EBITDA, due to negative forecasts for 2025 resulting from the reduction in new orders and the poor performance in demand for chips for electric vehicles.
The company is currently trading at $261.16 billion (market cap), a price of €660 per share , with a total of 393 million shares.
6.1 Conservative scenario
Sales will grow by around 2% in 2024 and at a rate of 15% in the following years.
Operating margin (EBIT) of 32%
Tax rate of 15%
Valuation multiples of PER 30x and EV/EBITDA 23x, multiples in line with their historical average
In a conservative scenario, the return on investment could be around 12% over five years, with a target price of €1,200 per share.
6.2 Optimistic scenario
Sales will grow by around 2% in 2024 and 20% in the following years.
An expansion of operating margins to 35%
Tax rate of 15%
Expansion of PER multiples 35x and EV/EBITDA 28x
In an optimistic scenario, the returns are really good for a company of this quality, above 20% at three and five years. I am not surprised that this happens.
Target price of €1,800 per share over five years.
5.3 Pessimistic scenario
Sales will grow by around 2% in 2024 and in the following years the company will reduce its growth from 12% to 15%.
Margin compression to 28%
Tax rate of 15%
Multiples of PER 26x and EV/EBITDA 20x
The returns are negative in the first years and a conservative 5% over five years, target price of €800 per share , under an unlikely negative scenario but one that can always happen.
Ultimately, ASML is the undisputed leader in lithography technology, a critical component in the manufacturing of semiconductors, which are the foundation of global technological innovation. With a monopoly on EUV lithography technology , essential for producing advanced chips, ASML has a key strategic position in the supply chain of companies such as TSMC , Samsung and Intel . Furthermore, its capacity for constant innovation, with the development of new machines such as the High NA , guarantees its future leadership in chip miniaturization. The growing demand for semiconductors in sectors such as artificial intelligence, 5G and electric vehicles further reinforces its long-term growth potential, making it a solid and disruption-proof investment.
Disclaimer
This analysis is not a recommendation to buy or sell, it is my personal opinion and each person should make their own analysis of the company.