ASML Holding NV (ASML)
The Company That Makes Tomorrow's Computers Possible
What ASML Does
ASML is the only company in the world that can create the incredibly tiny features needed in the most advanced computer chips. These chips power everything from smartphones to artificial intelligence systems.
To understand how remarkable this is, imagine trying to draw a line that is 50,000 times thinner than a human hair. ASML's machines can do exactly that, millions of times over, with perfect precision.
The company's most advanced machines use something called extreme ultraviolet light. Inside each machine, a generator shoots out 50,000 tiny droplets of molten tin every second. A powerful laser hits each droplet twice - first to shape it, then to turn it into plasma that gives off the special light needed. This light bounces off mirrors so perfectly smooth that if one were the size of Germany, its biggest bump would be smaller than a millimeter. The final light beam hits a silicon wafer with accuracy equivalent to shooting an arrow from Earth and hitting an apple on the moon.
This entire process happens in a vacuum because the light wavelength is so small that ordinary air would absorb it. Each machine contains more than 50,000 unique parts from 5,150 suppliers worldwide. When ASML ships a machine, it fills 40 freight containers and requires three fully loaded Boeing 747 cargo planes.
ASML controls 100% of the extreme ultraviolet market and over 90% of other advanced chip-making tools. Its main competitors, Canon and Nikon, have given up trying to match this technology. Only some Chinese companies, backed by unlimited government funding, are attempting to compete. But this is not something money alone can solve. It took the brightest engineers in the world nearly 30 years and tens of billions of dollars to develop this technology.
Why We Think ASML Is Undervalued
The investment case is straightforward: without ASML's machines, we cannot make the most advanced computer chips that power modern technology. The company trades at about 25 times its expected 2025 earnings, which seems reasonable for what amounts to a tollbooth on computing progress.
However, investors worry about two main issues. First, that demand for lithography (ASML's specialty) may have peaked. Second, that with Samsung and Intel struggling, only one major customer - Taiwan Semiconductor Manufacturing Company (TSMC) - remains at the cutting edge.
The Peak Demand Concern
Historically, as chip features get smaller, companies need more lithography equipment. But the industry is now also building upward on wafers rather than just shrinking features. This vertical approach uses more equipment from other companies and relatively less from ASML.
Yet this does not mean less demand for ASML's products - just slower growth in demand. Even if ASML's share of equipment spending declines slightly, total equipment spending is exploding. Over 10 to 20 years, temporary market share shifts matter little when the overall market is growing rapidly.
This reminds us of concerns about Moody's in 2016. The market feared the credit rating company was earning too much because of low interest rates. Even if true, buying a business that could grow mid-cycle earnings by over 10% annually for decades made the exact valuation multiple less important.
The Single Customer Risk
TSMC is indeed the main customer for the most advanced tools. Intel recently warned that without securing a major customer for its newest technology, it might abandon further development. We suspect Intel is signaling to the industry and the Trump administration about the importance of maintaining American semiconductor manufacturing capabilities.
Even if TSMC were ASML's only customer, the relationship works both ways. If TSMC refused a 3% price increase, ASML could simply say "buy your tools elsewhere" - except nowhere else exists. Companies like Nvidia would likely pressure TSMC to accept the increase rather than delay chip production. The semiconductor industry is so profitable that equipment costs can be passed through to customers.
Long-Term Growth Drivers
ASML's revenue depends on four factors: the number of wafers processed, layers per chip, dose requirements and equipment prices. We expect these to drive low double-digit revenue growth.
Wafers: Over 25 years, wafer production has grown about 4% annually. Looking at 20-year growth ending at the 2022 peak suggests 7% annual growth. We think 4% to 7% yearly growth is reasonable for the coming decades.
Layers: TSMC's current advanced chips use 19 to 20 layers of extreme ultraviolet processing. Its next-generation chips will use about 25 layers, with future chips expected to reach the high twenties. ASML projects advanced logic chips will grow from 19 to 21 layers in 2025 to 25 to 30 layers by 2030. Memory chips show even faster layer growth. We estimate 3% to 4% annual growth from increasing layers.
Dose: As features shrink, manufacturers must expose each layer longer to maintain quality. This is like shooting more arrows at a smaller target to hit the centre on average. Each chip node requires about 50% more exposure time to maintain the same precision. While suppliers work to minimize this increase, dose requirements will still add to growth over time.
Price: ASML uses value-based pricing tied to three factors: how fast machines run, how small features they can create and how precisely they align layers. As each new machine generation improves these capabilities, ASML can charge more. Given the company's monopoly position, it can also pass through inflation. We expect 2% to 3% annual price increases.
Margins: ASML expects gross margins to improve from 52% in 2025 to 56% to 60% by 2030. This reflects growing sales of higher-margin extreme ultraviolet tools, expansion of the profitable services business and standardizing machine designs to reduce costs. Combined with leveraging research and administrative costs, operating margins should improve by 2% to 3% annually.
Expected Returns
Adding these factors together, we expect ASML to grow revenue by 9% to 15% annually: 4% to 7% from more wafers, 3% to 5% from more layers, additional growth from dose requirements and 2% to 3% from higher prices. Management's own projections suggest 7% to 14% annual system sales growth through 2030.
At 25 times earnings, investors get a 4% earnings yield plus 9% to 15% revenue growth plus 2% to 3% margin expansion. This suggests potential returns of 15% to 22% annually. While results will be lumpy year to year, the valuation appears attractive given ASML's monopoly in a critical, growing market.
Risks
Slower Lithography Growth: If 2025 earnings are above the long-term average because lithography demand was growing faster than sustainable, our return estimates might drop by about 1%. Over decades, this makes little difference, though it could matter for near-term performance.
Geopolitics and Taiwan: Since ASML's supply chain is primarily in Europe and America, any conflict in Taiwan would eventually create a semiconductor equipment boom in friendly countries.
Customer Concentration: We have addressed this concern above.
Economic Cycles: This is a cyclical business. We cannot predict earnings in any given year. But we are confident that earnings will be substantially higher in 10 to 20 years.
What Could Drive the Stock Higher
Time will likely be the main catalyst as ASML executes its growth plan. Reduced uncertainty about trade tariffs could help, as could Intel securing customers for its advanced manufacturing processes.
ASML represents a rare opportunity to own the only company capable of enabling humanity's continued technological progress. At current prices, patient investors should be well rewarded.
Checks
ASML is Sharia-compliant according to Zoya.
Closing price of $813.87 has a 4-star rating on Morningstar.
This post is for educational and informational purposes only and does not constitute financial, investment, or other professional advice. All information presented is based on personal opinion and should not be relied upon solely to make any investment decisions. You should always do your own research and consult with a licensed financial advisor, attorney, or other professional before making any financial decisions. Past performance is not indicative of future results.