Netherlands-based ASML is the second largest supplier of semiconductor manufacturing equipment in the world, its primary involvement in the design, manufacturing, marketing, and servicing of photolithography systems.
ASML is the unicorn of the semiconductor equipment space in 2023, expected to grow revenue by almost 20%, while the industry sales fall on average 11% over the same time. We see these estimates as achievable given the company’s increased relevancy at the leading edge of EUV lithography.
Extreme ultraviolet lithography (EUV) adoption not only allows for technological advances, but provides ROI to leading edge chip makers that embrace EUV over legacy processes. Using EUV provides value to customers in three forms: fewer defects, reductions in cost, and shorter cycle times.
ASML has a monopoly position supplying lithography systems to leading edge logic and memory customers, alongside a large market share position supplying immersion (legacy) systems for trailing edge fabs. As EUV systems rise as a percentage of revenue mix, ASML margins will expand as expected.
However, in the last few quarters, demand for immersion systems has held up very well and ASML expects this to continue into the future given the supply constraints that remain for OEMs to source automotive and industrial oriented trailing edge devices.
Our target of $747 applies a P/E of 30x our 2024 EPS view, above peers. The valuation is a premium to its five-year historical average of 24x, justified, in our view, by its monopoly position and the accelerating adoption of its EUV systems for both logic and memory (DRAM) customers.
Downside risks include the extent of EUV adoption being less than expected, slower economic growth, and rising geopolitical tensions.