$ASML: Semiconductor Leadership Amidst Global Challenges
Introduction
Founded in 1984 as a spin-off from the Dutch electronics giant Philips, ASML has grown into a global technology powerhouse in the semiconductor industry. Today, headquartered in the Netherlands, ASML employs over 44,000 people worldwide, underscoring its expansive scale and critical role in global technology supply chains. The company remains at the forefront of the semiconductor equipment industry, firmly positioned to benefit from the continuous growth and increasing complexity of global semiconductor demand. Despite near-term market turbulence and geopolitical uncertainties, the ASML's unique technological capabilities and robust financial fundamentals underscore a compelling long-term investment thesis. ASML has been called the most important company in the world. Let´s dive in!
What is it all about?
Two words; Moore´s Law. ASML plays a pivotal role in extending Moore’s Law, the principle stating that the number of transistors on an integrated circuit doubles approximately every two years. Through its groundbreaking EUV and upcoming High-NA EUV lithography systems (check the Glossary at the end of the article), ASML enables semiconductor manufacturers to continue shrinking transistor dimensions beyond previous physical limitations. These advanced technologies facilitate higher chip density, improved energy efficiency, and enhanced computing performance, effectively sustaining the trajectory of Moore’s Law. ASML’s continuous innovation thus remains instrumental in pushing the boundaries of semiconductor development.
ASML operates a fundamental part of the semiconductor value chain, Lithography, where it is now the only company to offer the most advanced type of equipment, resulting in high customer dependency and lock-in.
Financial Performance and Growth Trajectory
ASML demonstrated resilient financial performance in 2024, with revenues reaching €28.26 billion, a modest yet steady increase from €27.56 billion in 2023. Looking ahead, ASML anticipates revenue growth of approximately 9% to €30.84 billion in 2025, primarily driven by robust demand for its Deep Ultraviolet (DUV) and Extreme Ultraviolet (EUV) lithography systems, including the highly anticipated High-NA EUV systems slated for launch in 2025.
Profitability remains strong, with EBIT margins at 32.1% for 2024, reflecting disciplined operational efficiency. EBIT margins are projected to expand further to 43.6% by 2029, driven by higher-margin EUV equipment sales and an increasing contribution from high-margin service and upgrades related to ASML’s expanding installed base.
Net earnings in 2024 were solid at €7.39 billion, slightly lower compared to €7.68 billion in the previous year, reflecting transient industry challenges rather than structural issues. However, long-term projections remain optimistic, with earnings per share expected to nearly triple from €18.79 in 2024 to €46.59 by 2029.
Looking at the surface of ASML one might say that the P/E is high, but we need to look closer at the business to understand if the P/E level is meaningful or not.
Using Magnificent 7 as a reference we see that a P/E around 30-35 is not uncommon, with Alphabet and Tesla being outliers each in opposite direction from the main cluster.
NVIDIA = 37
Amazon = 35
Apple = 35
Microsoft = 31
Meta = 24
Alphabet = 19
Tesla = 130
With all of the above in mind, let´s use a framework that views the P/E through a lens of Earnings Growth and Return on Invested Capital (ROIC):
Using this framework, ASML stands out as an attractive opportunity. With projected long-term earnings growth consistently surpassing 10% annually and a remarkably high ROIC projected to exceed 100% by 2027, ASML far surpasses the guided levels of this framework. As shown here, companies with a combination of high earnings growth (10%) and robust ROIC (24%) justify P/E ratios as high as approximately 25.7 times. ASML’s superior performance metrics thus easily justify its current and projected valuations, reinforcing its attractiveness within the semiconductor and technology industries.
Valuation Metrics: Attractive Entry Point
Currently priced around €626 per share, ASML presents an appealing valuation opportunity, particularly given the strength of its underlying business model. With a P/E ratio of 32 times for 2024 earnings, ASML’s valuation metrics are expected to become increasingly attractive over time, decreasing to approximately 14 times by 2029. Additionally, the Enterprise Value to EBITDA (EV/EBITDA) ratio is forecasted to fall from 31x in 2024 to just 11x in 2029, further supporting the attractiveness of the stock.
ASML’s dividend yield, currently at a modest 1.1%, is expected to steadily increase, indicative of management’s confidence in the company's sustainable free cash flow generation and prudent capital allocation strategy.
I value ASML on DCF basis and use a discount rate of 8.5%, Terminal growth rate of 3.5% and an EV/EBITDA multiple of 20x, and get a price target of close to €770.
ASML’s Unparalleled moat and technological superiority
The essence of ASML’s investment appeal lies in its strong and sustainable moat, primarily built on technological leadership, high switching costs, and strategic customer relationships. ASML commands approximately 90% market share in lithography systems, a critical technology essential for semiconductor manufacturing.
ASML's competitive advantage stems largely from its technological dominance. It is the sole provider of EUV lithography equipment, essential for manufacturing advanced semiconductor chips. EUV technology, which enables finer resolution of semiconductor patterns, is indispensable for leading chip manufacturers aiming to produce the most advanced semiconductor nodes.
The launch of High-NA EUV equipment during 2025 further enhances this technological edge, promising greater precision and productivity, solidifying ASML’s competitive lead. This advancement is crucial as chipmakers continue to push the boundaries of performance and energy efficiency.
Potential competitive challenge from China
Recent reports suggest that China may have achieved a technological breakthrough in Extreme Ultraviolet (EUV) lithography by advancing a laser-driven discharge plasma (LDP) method, in contrast to ASML’s current laser-produced plasma (LPP) approach. It’s worth noting that ASML itself initially explored LDP technology in collaboration with Philips before opting to pursue LPP in partnership with Cymer. The shift to LPP was primarily driven by significant power and scalability advantages; LPP technology currently offers power levels exceeding 250W compared to approximately 100W achievable with LDP.
The constraints associated with LDP technology—such as limited plasma energy density, electrode erosion, contamination issues, and inefficient energy conversion—pose considerable obstacles to its scalability for mass production. While the Chinese-developed LDP approach might be suitable for niche or smaller-scale applications, it remains unlikely to compete effectively with ASML’s established mass production capabilities in the foreseeable future.
Furthermore, EUV lithography is not solely about the light source; it also involves highly sophisticated subsystems, such as optics and mirrors, which have not been adequately addressed in recent Chinese developments. One very critical aspect that will hinder the uptake of potential competitive systems is that chip manufacturers care very deeply about yield, and any change that poses a risk to yield will simply not be relevant. For the same reason, the complexity involved in integrating multiple intricate subsystems into a fully operational EUV scanner, along with the requirement to establish a supporting ecosystem—including pellicles, masks, and resist materials—suggests China is still likely several years away from catching up to global leaders in advanced chip manufacturing technologies.
Substantial Research and Development investment
ASML’s continued dominance is supported by substantial investments in research and development. In 2024, the company dedicated €4.3 billion to R&D, employing around 16,000 highly specialized R&D personnel—far exceeding its industry peers. This scale of investment ensures ASML maintains its technological lead, continuously innovating to meet the increasingly sophisticated demands of semiconductor manufacturers.
High switching costs and customer Lock-in
Another key pillar of ASML’s moat is the significant switching cost associated with its lithography equipment. Customers such as TSMC, Samsung, and Intel have invested billions of euros in infrastructure specifically optimized for ASML’s technology. Transitioning to alternative lithography technologies would not only entail substantial financial outlays but also risk substantial operational disruptions (subpar production yield). Thus, ASML’s customers remain effectively "locked-in" for decades, guaranteeing substantial recurring revenues from services and upgrades.
Recurring revenue model
ASML's business model benefits substantially from its installed base management strategy. Equipment sold generates consistent, long-term revenue streams through maintenance, service, and upgrades. ASML's DUV systems, for instance, typically yield about 130% of equipment revenue in recurring service revenue over their lifecycle. EUV systems, being more complex, are anticipated to generate even higher recurring revenues, potentially exceeding 150%.
Navigating geopolitical and market risks
ASML’s strategic positioning, however, is not without challenges, particularly given the current geopolitical tensions affecting its China operations. In 2024, China accounted for 36% of ASML’s total revenue, driven by a backlog of orders from previous years. However, recent regulatory developments, including new export restrictions by both the Dutch and U.S. governments targeting advanced DUV systems, pose potential headwinds. ASML has managed these compliance risks effectively, but future expansions of restrictions remain an uncertainty requiring close investor monitoring.
Commitment to reducing energy consumption
ASML’s ESG initiatives further reinforce its investment appeal. The company has successfully reduced energy consumption per wafer pass by approximately 50% since 2018 for its EUV systems, significantly reducing operating costs for customers while also addressing environmental concerns. Continued improvements in efficiency and sustainability practices position ASML favorably in this area for the future.
Conclusion: Long-term bullish
ASML presents a compelling investment opportunity underpinned by robust financial performance, attractive valuation metrics, and an unparalleled competitive moat built upon technological superiority, substantial R&D investments, and strong customer lock-in.
Although ASML faces potential short-term risks from geopolitical uncertainties and industry cyclicality, its proactive inventory management, disciplined capital allocation, and uniquely powerful competitive position—effectively a monopoly in lithography technology—position it exceptionally well for sustained long-term growth.
In my view, ASML remains a cornerstone investment in the semiconductor sector, offering both resilience and substantial growth potential amid an evolving technological landscape.
I have a position in ASML and also find its current level attractive to add more. The above is however not intended as investment advice.
With that, thanks for reading I truly appreciate the interest. Below are a few ideas for further readings and inspirations.
Glossary
EUV: Extreme Ultraviolet (advanced lithography technology for smaller semiconductor nodes)
DUV: Deep Ultraviolet (standard lithography technology for semiconductor manufacturing)
LPP: Laser-Produced Plasma (high-power EUV light source technology currently used by ASML)
LDP: Laser-Driven Discharge Plasma (alternative EUV light source method)
High-NA EUV: High Numerical Aperture Extreme Ultraviolet (next-generation EUV lithography enabling even finer chip details)