ASML is a wonderful company with decent growth prospects, but its long-term growth potential is right now. It may be a good time to take profits now as the price of ASML has risen in the previous three months. In March, the stock price rose about 18%, while the S&P 500 rose only 6% over the same period. Intel, TSMC, Samsung Electronics (OTC: SSNLF), and others rely on ASML for EUV lithography, which is important for manufacturing advanced technologies (7 nm and less). With the next two years of capacity, it is estimated that ASML will produce around 55 units per year, but it will likely take some time before the company is able to expand its annual capacity due to the construction of a new plant. ASML’s forecasted investor day in September is expected to provide additional information on ASML’s 2025 revenue projections, and these estimates may be overly modest.
For ASML’s last quarterly investor call in 2018, the company predicted it would generate revenues of €15-24 billion by 2025, and the estimate would certainly be revised upwards. Further support for increasing revenue may arise if ASML can produce high NA in the next three to four years. ASML (ASML) is a robust company with good growth prospects as EUV revenues exceeded market expectations. On the other hand, however, it has experienced a good rise in its share price over the past three months and therefore does not have the same potential returns as three months ago.
ASML Holding holds a market position like no one else in the lithography industry. It enjoys a near-monopoly of EUV lithography, the most advanced technology platform in the industry. ASML is facing fierce competition in DUV because of the essential role they play in the semiconductor manufacturing process. While recognizing ASML’s promise and its future journey, the company is apparently overestimating the company’s capabilities. There is only one company in the world capable of making the latest-generation chips, such as 5nm and 3nm. For each new generation of EUV equipment, throughput and downtime increase, meaning throughput increases with time.
ASML is light years ahead of any company that faces it. In the business world, everything revolves around process knowledge. If a competitor entered the EUV area, it would be years and years behind ASML. The company has mapped out the envisioned path ahead, describing how it intends to achieve optimal profit margins for its customers while reducing its suppliers’ costs. Overall, the semiconductor industry is projected to outpace overall GDP with an annual growth rate of 8.6% over the next few years.
These three companies, Taiwan Semiconductor, Intel, and Samsung Electronics, are expected to have investments in excess of $200 billion by the end of the decade. ASML pioneered EUV lithography, and there are no rivals in sight for the foreseeable future. According to the semiconductor industry, growth is expected to be at an annual growth rate of 8.6% since 2018, exceeding GDP. ASML, the leading semiconductor supplier, will play a crucial role in supporting manufacturers (foundries). Strong industry capital spending is driving demand for products. Risks that have arisen due to geopolitical tensions, including in the stock market, the supply chain being disrupted as it already is, and competition for talent are present. Significant growth is expected in the management of the installed base, which is expected to grow 29% year-on-year from 2019 to 2020.
With 2021 removed, the CAGR is 6.5%. Projected revenue growth from 2026 to 2028 is now expected to be between 3.5% and 8.6%, assuming we subtract the huge increase from 2020 to 2021. ASML is a key player playing a significant role in technological advances in order to help solve the semiconductor shortage. 85% of the DUV market and near-monopoly within the EUV is under ASML control. With Wall Street analysts estimate at $722, the stock price is about an inch away from its 52-week high.
Regardless, however correct analysts may be, there is no safety margin if their predictions are correct. To meet demand and increase capacity, ASML may be overdelivering on its revenue estimate with a solid future, it has the potential to succeed, but the current price and lack of safety margin make investors skeptical. The company has a large market share for the two main lithography products DUV and EUV. As all of our gadgets, automobiles, 5G, data centers, and cloud servers depend on the technology platform provided by ASML, the market is supported by extremely strong favorable winds.
While there is a potential for ASML to grow at or beyond its current valuation, averaging the cost in dollars would be a smart way to do this. ASML shares are 1 cent away from their 52-week high. Even though the value of the stock market and its multiples have increased recently, it is possible that current market valuations are still underestimating ASML’s ultimate potential. However, any projection that spans the next five to ten years has a significant amount of uncertainty and assumptions. ASML doesn’t do anything bad, but unfortunately, the stock market has recognized the company’s incredible history and future potential for some time.
Next-Gen Tool (EUV)
ASML is a semiconductor equipment manufacturer of one of the industry’s most essential lithography tools: light-based printing for chips. ASML is facing significant delays in next-generation products, which will likely affect its growth. ASML’s current product portfolio is performing well overall, although ASML’s investment in R&D has stalled. With the increasing scarcity of semiconductors, demand for the company’s products is high. Despite the prevailing opinion, ASML is expected to maintain its current rate of growth.
EUV Lithography Tools (EUV) can only be produced by ASML, which announced that it delivered 31 EUV tools in 2020, short of its previously stated goal of delivering 35. Intel’s 7nm delays had a substantial impact on total ASML shipments: This reduces shipments by four units. In the last quarter, the company lost one of its top five customers (Huawei) at an alarming rate. Previously, ASML had stated that it planned to expand the total number of EUV tools it produces to between 45 and 50 by 2021.
In previous sections, it was explained that ASML was not able to meet the increase in EUV demand due to long lead times for delivery in the supply chain. To date, ASML has only managed to produce 40% of the tools it planned to make by 2020, making it the fourth or fifth consecutive year that ASML has failed to meet its annual delivery target. Despite lower-than-expected EUV deliveries, ASML is forecasting a 30% growth in EUV through 2021. Recently, EUV wafers were at very low exposure, so service revenue depends on it. Future use of EUV is also anticipated in the DRAM memory market.
One example is TSMC, which is building a new 28 nm factory (back edge). Even after the initial EUV rollout, ASML’s long-term growth prospects remain positive. A state-of-the-art instrument to solve this problem, called High-NA EUV, is currently under development and is expected to have a resolution of 0.55. At that rate, it will be more expensive than a commercial airliner and will cost more than $300 million. Consequently, however, the introduction of high-resolution NA lithography was delayed for several years.
This is the first time in ASML’s history that it has a market valuation in excess of $280 billion, with a P/E ratio of more than 40 times. Intel still has annual revenue that is a multiple of ASML. For long-term investors, this shouldn’t matter, as ASML is generating billions of dollars from the EUV for the first time. According to previous forecasts, ASML’s high NA EUV machines were supposed to be launched in 2023. Before the new tool launches, the company’s growth options are manifold. With regard to ASML’s long-term growth potential, there is no compelling reason to be less enthusiastic; however, this is already represented in the current share price.
History of ASML
ASML Holding NV is a Dutch company that designs, manufactures, and markets equipment and consumables for the semiconductor industry. ASML uses the most advanced technology available to make its equipment the industry standard; being the only company that offers a complete portfolio of processes, it is also the only company that can cover all aspects of semiconductor manufacturing, from initial production to the final piece.
ASML was founded in 1981 as a spin-off of Philips Semiconductors (which changed its name to NXP Semiconductors NV in 2007). It split from Philips because of the slowdown in the semiconductor market. ASML was once largely held, but its shares fell after 1999, and many investors didn’t want to risk their money in a slowing industry. But that was before ASML built the most advanced lithography machines in the world. In 2003, ASML bought Cymer, a chip-making competitor. This allowed it to sell to the top three manufacturers of silicon-on-insulator (SOI) wafers for foundry: GlobalFoundries, Samsung Electronics, and TSMC. In 2006, it purchased Lam Research for about $4.
Semiconductors must be demanding. If the semiconductor goes wrong, it will be catastrophic for all of us. In the 1990s, the silicon industry was beset by a particularly difficult challenge: researchers found that it was becoming more difficult to take the measurements needed to create circuits. Synchrotron radiation (the most accurate form of electromagnetic radiation) was not a good option. Quantum mechanics and other forces have impeded the researchers’ ability to build chips with precision. The problem was difficult to overcome; modern microchips contain hundreds of millions of individual chips.
As per ASML, its strategy is focused on providing a complete system solution that meets the widest range of customer requirements, including leading foundries, memory, logic, and image manufacturers, as well as customers serving the entire semiconductor value chain. In October 2016, ASML reached an agreement with Samsung Electronics Co. Ltd. to acquire the latter’s CMOS image sensor business for approximately 1.05 billion euros. For this acquisition, cost synergies of more than 250 million euros were expected. In February 2017, ASML announced the creation of ASML Battery Metals, a joint venture with Hella Aglaia Mobile Electronics (HAM) to develop and commercialize ferrite-based solid-state battery technology.
ASML has a market capitalization of $68.9 billion and trades at $686.35. The stock has a P/E ratio of 23.6 and a direct P/E ratio of 17.9. This is slightly above the S&P 500’s direct P/E ratio of 18.0 but well below the broader semiconductor industry average of 39.7. Over the past 12 months, ASML has earned $5.96 billion with an EPS of $6.35. The company is expected to earn $5.62 this year, meaning it is trading at a future P/E ratio of around 14.1. The move has been supported in recent months by investor enthusiasm around ASML’s partnerships with Samsung and TSMC. ASML reports first-quarter results that saw a record number of wafers shipped to the global semiconductor industry.
This business will have the support of industry and government, and they should get the green light. Analysts believe ASML should now price above the $686.41 per share price and that the acquisition is finally approved and ASML Holding NV will be the strongest supplier of semiconductor equipment in the world by the end of the decade. We wouldn’t be surprised to see the stock price rise above the $686.41 level in a few years.