We came across a bullish thesis on ASML Holding N.V. (ASML) on Capitalist Letters’s Substack by Oguz Erkan. In this article, we will summarize the bulls’ thesis on ASML. ASML Holding N.V.’s share was trading at $714.10 as of Oct 21st. ASML’s trailing and forward P/E were 37.33 and 23.98 respectively according to Yahoo Finance.
An aerial view of a modern fabrication center with equipment for producing semiconductor components.
ASML has established itself as a dominant player in the semiconductor industry by revolutionizing lithography technology, particularly with its development of extreme ultraviolet (EUV) lithography machines. The journey began in the early 1990s when conventional lithography machines operated at a 193 nm wavelength. A pivotal moment occurred in 1991 when scientists at Bell Labs suggested the feasibility of utilizing a 13.8 nm wavelength, which led to the ambition of achieving x-ray lithography. However, focusing x-rays using traditional optical methods posed significant challenges, prompting the exploration of EUV light. While the technology was promising, it required extensive research and development over nearly two decades, with ASML initiating its investment in EUV lithography in 1999.
To bring its vision to fruition, ASML made strategic investments in essential components, such as committing $1 billion to Zeiss for precision mirrors and forming joint R&D partnerships with over 5,000 suppliers. It even acquired key suppliers, including Brion Technologies, Cymer, and Hermes Microvision, to secure the necessary technologies and manufacturing capabilities. This extensive supply chain management culminated in the delivery of ASML’s first commercial EUV lithography machine to Samsung, a state-of-the-art system comprising over 100,000 parts, underscoring ASML’s unique market position. With a 100% market share in EUV machines and over 90% in deep ultraviolet lithography (DUV), ASML’s moat is remarkably robust, making it nearly impossible for competitors to enter the market.
The competitive landscape is further enhanced by the prohibitive cost of ASML’s machines, priced around $200 million each, and the complex nature of switching suppliers for manufacturers reliant on ASML’s technology. ASML’s relationships with its suppliers not only solidify its market dominance but also improve the quality of its other products, allowing it to capture an increasing market share. The company’s moat is so formidable that even with emerging technologies, no viable competition is on the horizon.
ASML’s investment thesis is self-evident: the company’s moat is unlikely to erode, and its position as a monopoly in the lithography space will likely enable it to command significant market rents for years to come. With chip demand anticipated to grow at 9% annually through 2030, spurred further by advancements in AI, ASML is well-positioned to benefit from this trend. The introduction of its next-generation high numerical aperture EUV lithography machine by 2027 is set to enhance revenue, potentially easing restrictions on sales to China and expanding its market reach.
In terms of financial health, ASML’s impressive performance is evidenced by a doubling of revenues over the past five years, while operating income has nearly tripled. Its solid balance sheet features an equity pool nearly three times larger than its total debt, alongside an EBIT that could cover its debt in under a year. The company’s gross margins have expanded significantly, from 44% in 2019 to 51% in 2024, reflecting its strong pricing power. ASML’s return on invested capital (ROIC) stands at a commendable 22%, indicating effective reinvestment strategies. Overall, ASML is poised for sustained success, making it a compelling investment opportunity for those looking to capitalize on the future of semiconductor manufacturing.
ASML Holding N.V. is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 81 hedge fund portfolios held ASML at the end of the second quarter which was 75 in the previous quarter. While we acknowledge the risk and potential of ASML as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ASML but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.