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ASML Stock Research Report 2.6.2024

Ticker: ASML
Sector: Technology
Industry: Semiconductor Equipment
Headquartered: Netherlands
Moat: Wide – Intangible Asset- IP, Technology, Switching costs, Economies of scale

Action at date of this post

Accumulate as of 2.6.2024
This is technically a buy opinion. Accumulate means if you are an investor that buys periodically then keep buying. If you do not own it but are looking to buy this is an indication to open a position of no more than 25% of your intended, total position.

ASML Corporate Overview

ASML Holding N.V. is a leading Dutch company that specializes in the design and manufacturing of advanced photolithography equipment used in the semiconductor manufacturing process. ASML enjoys 90% market share in photolithography machine sales. The company’s cutting-edge technology plays a crucial role in the production of integrated circuits and microchips for a wide range of electronic devices. ASML’s flagship product is its lithography machines, which use extreme ultraviolet (EUV) light to etch intricate patterns on silicon wafers, enabling the creation of smaller and more powerful semiconductor components.

The company’s main business segments include DUV (Deep Ultraviolet) and EUV lithography systems. While DUV technology has been the industry standard for many years, EUV lithography represents a groundbreaking advancement, allowing for even smaller and more densely packed features on semiconductor chips. ASML’s EUV systems have gained significant traction in the market due to their ability to meet the demanding requirements of advanced semiconductor nodes.

ASML Segment Analysis

While not a simple company, rather the highest of high tech, AMSL operates simply in two segments systems sales (73%) in 2022 annual report and services 27%. A key component of appreciating structure of the business is that ASML’s machinery can last up to 30 years. Therefore, services are a critical and growing role in the company’s profitability.

ASML does not create much in terms of visuals of the breakdown in segments as the company is simple on that front. I found this chart fascinating and very informative.

ASML Moat Source

ASML’s wide moat comes thanks to its deep integration with the world’s major semiconductor fabricating companies. ASML’s lithography equipment is critical to the fabrication process and is the only maker of this essential equipment. AMSLs moat is bolstered by high switching costs, strength of its IP and economies of scale. It would take many years just for a competitor to attempt to build the facilities just to try to manufacture a competitive product.

ASML Growth Outlook

Many of the planet’s leading semiconductor fabricating companies (Taiwan Semi, Intel, and Samsung) redesigned their factories to use ASML ultraviolet lithography equipment. The fact that the process was long and costly for each fab means there will be no change anytime soon. 

The machines ASML sells take 12-18 months to assemble, weigh 200 metric tons and take up dozens of square yards. To build such machines, the company contracts with many other companies and research institutes to supply parts and know how. The end result is a machine that balances electricity, mechanization and physics to work in the space of nanometers.

The company’s technological prowess is unmatched as of now and its hard to see a competitor coming up to match the €4 billion in R&D spending. With each lithography machine costing  €200-300 million, ASML has solidified its technology as one that gives customers ROI.

With machines lasting longer than 30 years, the company sits in a great position to provide service for the very technical machines. The entirety of its installed base are all serviced by the company. This gives the company a sticky and growing source of revenue. With 90% of all lithography machines ever sold still in use there is no question of the reliability and durability of the products.

As the world looks to AI, automation and autonomous transportation so to does it look to ASML to make the equipment needed for such advancements. 

ASML By The Numbers

Financially sound with a huge delta between its ROIC/ROCE and its cost of capital, ASML’s management is very effective. Few companies on the planet enjoy a moat as wide as AMSL which allows the company to have high and consistent ROIC. The company is super efficient in converting profits into free cash flow with consistently high cash conversion. The company pays a reasonable dividend that it has grown for 13 years in a row which makes it an international dividend aristocrat. Management has also taken advantage of price dips to retire shares. I like when companies are smart about how much they pay to retire shares. 

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This website and associated newsletter along with its content/links are not financial advice. Nothing in this newsletter is an investment recommendation. All content is created for entertainment, educational, or informational purposes only. My strong buy, accumulate, hold, reduce or sell opinions are exactly that – opinions. Be sure to do your own research for your own particular circumstances or higher a professional advisor.

At the time of writing, the author holds a position in ASML.

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