ASML, the Jewel of Europe

Understanding ASML's Technological Dominance

ASML is the world leader of litography equipment used in the semiconductor manufacturing process. From enabling the production of smaller, faster, and more powerful microchips to facilitating breakthroughs in areas like artificial intelligence and autonomous vehicles, ASML's impact spreads across industries.

This technological dominance is also a source of geopolitical tension. In this article, after a description of the business, we will identify the risks and opportunities, the market outlooks. We will finish by a fair price estimation.

Company overview

ASML is specialized in litography. They have an holistic approach and integrate lithography systems with computational tools, metrology and inspection systems, and process control software solutions. This enables them to provide their customers with support and solutions at every stage of the chipmaking process, from early design and development to high-volume production.

As a reminder, to better understand what litography is, here are the different steps of the microchip manufacturing process:

• Deposition – The first step is typically to deposit different materials onto a silicon wafer

• Photoresist coating – The wafer is then coated with a light-sensitive layer called a photoresist

• Lithography – Light is projected onto the wafer through a reticle. Optics shrink and focus the reticle pattern. This pattern is then printed onto the wafer

• Baking, developing and etching – The wafer is then baked and developed to make the pattern permanent

• Ion implantation – The wafer may be bombarded with ions to tune the semiconductor properties

• Removing photoresist – After the layer is etched or ionized, the remainder of the photoresist is removed

Throughout this process, ASML provides various types of equipment:

• Extreme Ultravioler (EUV) litography systems. Several models are avaiable depending on the technology / precision

• Refurbished systems to upgrade older lithography systems

• Metrology and inspection systems s to measure the patterns that they print on the wafer to see how well they match the intended pattern

• System and process control software. They enable automated control loops to maintain optimal operation of lithography processes and therefore maximize yield

• Computational lithography to predict and enhance the process window of the lithography systems by calculating the optimal settings, depending on the specific application

• Services to manage the installed base

In 2023, most of the revenues were in Asia. This might reduces in the coming quarters.

Interesting to note that 20% of the revenue depends on the service (maintenance, spare parts, software) division and si therefore reccuring.

Fun fact: each unit sold has an average price around €50M!

How ASML maintains its leadership

With €27.6B sales in 2023 and 42k employees, the Dutch company is growing quickly and uses its financial resources to spend €4.0B in R&D and maintain its technological advance. This R&D spending represents a 22% increase compared to 2022.

50% of the revenue is used for sourcing, showing the importance of the upstream supply network. It is constituted by 5,100 suppliers.

This allows to increase the patent portfolio with +50% in just 5 years.

The complexity of the product, the technology and the upstream supply chain are the key elements of the moat of the company.

Strategy

ASML’s strategy rests on 4 pillars:

• Grow the holistic lithography business. They will rely on their R&D, new products and the trust they have built with their customers.

• Secure unique supply chain capabilities. The supply chain complexity is a key of the performance and of the moat. To protect it, they are proactively assessing our supply base for projected demand and control of future roadmap-enabling capabilities.

• Diversify towards adjacent business opportunities. Not a lot of details for now, but no doubt they are investing a lot to widen their product range in the semiconductor manufacturing chain.

• Deliver on their ESG sustainability commitments.

They also aim to create a whole environment made to create sustainable long-term value, from people and culture to R&D and innovation ecosystem.

Major risks to monitor

Several risks must be monitored when following ASML stock. Most of them are increasing in probability and impact:

• Geopolitcal tensions. As Asia represents most of the sales of the company, 3 main tensions create risks. 1. China - USA economic war. 2. China’s claim on Taiwan. 3. North Korea’s threat on South Korea. As a reminder aach of these countries (China, Taiwan, South Korea) represents around 25% of the sales. This can create short term issues. For the moment, all the obstacles have been overcome without much impact.

• Competition. Nikon and Canon are the 2 main competitors. On specific segments, we also find companies like Applied Materials and KLA Corporation. The main asset of ASML to mitigate this risk is its R&D.

• Supply chain disruption. With a very complex upstream supply chain with thousands of suppliers, disruption is a huge risk that can be mitigated by a better control, long term relationship and close monitoring.

• Customer dependency. In 2023, 53% of the revenues were made by 2 customers.

• Technological risk. New solutions can always emerge from competitors. Once again R&D is the best way to stay ahead.

Outlooks and future growth