"From $100K to $1M" & More.

Share this post

ASML Holding ($ASML) Deep Dive

www.from100kto1m.com

Discover more from "From $100K to $1M" & More.

Sharing my investing journey of trying to turn $100,000 into $1,000,000 via public and private equities.
Over 2,000 subscribers
Continue reading
Sign in
Equity Research

ASML Holding ($ASML) Deep Dive

"An enabler of global digital transformation."

YZ
and
Damia Othman
Aug 17, 2023
16
Share this post

ASML Holding ($ASML) Deep Dive

www.from100kto1m.com
7
Share

This write up was done in collaboration with

Damia Othman
, 99.99% of the work/research was done by Damia Othman, I just put couple of final touches.

If you would like to learn more about Damia, you can check out her substack

IntVestor
& her Twitter page.

"From $100K to $1M" & More. is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.


Disclaimer is at the end.
ASML Logo and symbol, meaning, history, PNG, brand

The semiconductor industry is expected to grow at a CAGR of +9% between 2020-2030E. I believe ASML is one of the potential beneficiaries of the growing semiconductor industry. 

Introduction

ASML 0.00%↑ share price has increased by 20% YTD due to 1) strong YTD earnings results performance, 2) increasing demands for semiconductor supplies, and 3) a rising trend for Artificial Intelligence (A.I.) related stocks.

Company information

ASML Holding N.V. (ASML) is involved in the development, production, marketing, sales, upgrading and servicing of advanced semiconductor equipment systems. This includes lithography, metrology and inspection systems. 

The group was founded in April of 1984 and is headquartered in Veldhoven, the Netherlands. It operates through its subsidiaries in the Netherlands, the United States, Italy, France, Germany, the United Kingdom, Ireland, Belgium, South Korea, Taiwan, Singapore, China, Hong Kong, Japan, Malaysia and Israel.

Share price performance since inception

Source: koyfin

ASML shares are listed on the Euronext Amsterdam stock exchange and Nasdaq as New York Registry Shares. Since its inception, the stock has climbed over 3,000% in line with the increasing demand for global digital transformation since the 1980s.

Ownership information

The ownership of ASML is divided into 34.8%% of various institutional funds, 0.03% of individual insiders and 65.1% of the general public thus providing healthy liquidity to buy and sell the stock. 

Note that the biggest shareholders belong to BlackRock Inc. holding at 5.9% followed by The Vanguard Group Inc. at 3.7%.

ASML ownership breakdown

Source: Simply Wall St

Business Model

A global holistic lithography provider

The group provides chipmakers with hardware, software and services to mass-produce patterns on silicon through lithography. ASML also provides control software solutions for its lithography process and continues to support its customers be it for services, technical support products and upgrades of equipment. 

It has a global presence across Asia, North America as well as the Europe, Middle East and Africa (EMEA) markets.

Key products and services with a global presence

Source: Company Annual Report 2022

Lithography Manufacturing Process

According to ASML, lithography is a driving force in the creation of more powerful, faster and cheaper chips. The manufacturing of chips becomes increasingly complex as semiconductor feature sizes shrink. At the same time, it is important to mass produce at the right cost. 

ASML lithography product portfolio contributes to optimizing production and enables affordable shrink by integrating lithography systems with computational modelling, as well as metrology and inspection solutions. 

Semiconductor Manufacturing Process

Source: Company Annual Report 2020

Lithography in the supply chain

ASML customers consist of leading microchip manufacturers grouped as Memory and Logic chipmakers. The company design the machines based on the customer’s input and they work collaboratively to ensure the machines run smoothly on their fabs. 

Memory chips can store a large amount of data in a very small area. They are used in an increasing variety of electronic products like servers, data centers, smartphones, high-performance computing, automotive or personal computers and other communication devices.

Share

Whilst Logic chips, which process information in electronic devices, are produced by two groups of manufacturers. The first group, known as integrated device manufacturers (IDMs), designs and manufactures Logic chips. The second group comprises contract manufacturers known as foundries. Foundry manufacturers produce chips for ‘fabless’ companies that focus only on chip design and distribution but do not manufacture microchips themselves.

Source: Company Annual Report 2022

The manufacturing of chips becomes increasingly complex as semiconductor feature sizes shrink, but there’s always the need to mass produce at an acceptable cost. According to the company’s 2022 annual report, ASML’s holistic lithography product portfolio helps to optimize production and enable affordable shrink by integrating lithography systems with computational modelling, as well as metrology and inspection solutions that help their customers to improve their yield.

On the supply side, ASML has around 5,000 suppliers whereby 39% are from the Netherlands, 41% are from the EMEA (excluding the Netherlands), 13% are from North America and the last 7% are from Asia. 

Revenue Analysis

Geographic revenue breakdown

Over 95% of ASML revenue comes from the Asia region which includes; Japan, South Korea, Singapore, Taiwan, China and the rest of Asia. Other locations like the Netherlands, EMEA, and the United States only accounted for 3.4% of the group’s total revenue. 

Considering that the majority of the top semiconductor producers are based in Asia, this geographical breakdown makes sense. Note that the United States possessed around 12% of the world's global chip manufacturing capacity as of 2021.

Market use revenue breakdown

ASML customers using the lithography technology are from the Logic market which accounts for 47% of the group’s revenue. Whilst customers from the Memory market account for 26% of the revenue. The balance of 27% of the group’s revenue comes from services and field options for the installed base. 

Over the past five years, the revenue from all three markets has been growing steadily thus contributing to ASML YoY solid topline growth. 

Revenue from different technologies

The net system sales revenue in this case refers to the total revenue generated from both the Logic and Memory markets. Across the two types of markets, ASML systems sales come from its product lines like EUV, ArFi, Arf dry, KrF, and I-Line, as well as Metrology and Inspection. 

Over the past five years, ASML's net system sales unit increased by 66% between 2018 to 2022. The revenue however has increased by 87% during the same period. As demand increases, and there is continuous development in the technology, the group is able to sell at higher prices.

Financial Outlook

Revenue is projected to CAGR at +13.1% for 2022-25E

According to consensus, ASML total revenue is projected to grow at a CAGR of 13.1% between 2022-2025E. While the management is projecting ASML to deliver 30% YoY growth for 2023E. This is driven by 1) stronger installed-based management sales, and 2) a continuous robust demand for semiconductor chips.

Net profit is projected to CAGR at +18.2% for 2022-25E

Moreover, the net profit is projected to CAGR at 18.2% for 2022-25E on the back of 1) steady sales growth and 2) slight improvement in gross margins as management continues to operate at the right costs through better costs management.

Gross margins are stabilizing

According to ASML's recent quarterly results briefing presentation, management expects to sustain its gross margins around the 50% level for 2023E. This is a 2.7%-points below its peak gross margin level in 2021 of 52.7%. Even then, still better than pre-pandemic levels of below 48%.

Key Drivers

Global semiconductor market CAGR at +9% for 2020-2030

According to management, the global semiconductor market is projected to grow at a CAGR of 9% between 2020-2030. This is driven by steady long-term growth expectations within the smartphone, personal computing, consumer electronics, as well as wired and wireless infrastructure boosted by double-digit CAGR from the automotive, Industrial electronics as well as servers, data centers and storage markets. The growing trend for the semiconductor market should bode well for ASML as it is the biggest lithography manufacturer globally.

Significant investment in complex R&D

In order to maintain ASML’s competitiveness, the group has been steadily increasing its investments in Intellectual Property (IP) through various Research and Development (R&D) programmes. The patents are also a way to protect the company’s investments in its R&D from the use of its third parties and exploitation by its competitors, customers, suppliers and co-developers.

IP portfolio trend vs R&D Investments

Source: Company Annual Report 2022

Share repurchase program

On the 10th of November 2022, ASML announced a new share buyback program to be executed by the 31st of December 2025. As part of this program, the group intends to repurchase shares up to an amount of EUR12bn, of which they expect a total of up to 2mn shares will be used to cover employee share plans. ASML intends to cancel the remainder of the shares repurchased. The new program has replaced the previous EUR9bn share buyback program in 2021-2023 which was completed on the 18th of October 2022.

A share buyback is a good thing for investors as it reduces the number of outstanding shares in the market thus increasing the potential EPS of the company and making the shares more valuable to shareholders. ASML has been actively returning profits to its shareholders through share buybacks and dividends.

Regular share buyback and dividend distribution for shareholders

Source: Company Annual Report 2022

Healthy cash flows

Furthermore, ASML cash flow has been showing healthy signs of growth in line with the EPS trajectory with the exception of the decline in 2022 to EUR21.96/share vs EUR28.47/share in 2021. I believe this is due to higher CAPEX in 2022 (EUR1.3bn) vs 2021 (EUR900mn).

Typically, as FCF/share improves, the ability of the company’s delivering better earnings also improves. However, I do believe management has been adopting healthy cash flow management for the company which in turn may lead to better earnings prospects in the coming years.

Normalised basic EPS vs FCF/share

Source: koyfin

Key Risks

Despite the rosy outlook, I am cautious of the following risks which may limit earnings delivery by ASML:

  1. Geopolitical tensions may affect trade routes and deliveries to customers as well as supply chain disruptions,

  2. Competition for market share within the growing semiconductor industry,

  3. The increasing complexity of products and technology may be costly without proper cost management,

  4. Financial results coming in below consensus estimates and management earnings guidance.

Company Valuations

Industry PE comparison

According to Simply Wall Street, ASML is currently trading at 34.5x PE which is on the pricier end of the industry average PE of 28.1x. Even then, I believe the current PE seems to be justified considering its market leadership position in the manufacturing of lithography market.

Source: Simply Wall St

Short-term valuation

The share price has increased by about 20% YTD. It is currently trading around its five-year historical forward mean PE of 31.6x. At current levels, the share prices seem to be fairly valued on a one-year forward earnings basis.

Mid-term valuation

On a mid-term basis, considering the strong earnings outlook and positive investors’ sentiment on the stock, I do find the stock to still be attractive. Note that ASML's share price is currently trading around EUR621.10/share. 

Below are my target price projections assuming that the stock may be trading between 25-35x PEs based on consensus earnings forecasts between 2023E to 2025E. If there are opportunities in the near term, I would accumulate below the EUR600.00/share level. The risk here is when earnings forecasts come below the consensus estimates or management forward guidance.

Upside potential based on consensus earnings forecasts to various PEs


IntVestor

I share research and insights on investing internationally
By Damia Othman

Holdings Disclosure

At the time of this publication, Damia Othman does not owns shares in ASML ASML 0.00%↑ but she is considering while I (YZ) don't.

P.S. Don’t forget to ❤️ if you enjoyed it.

Disclaimer

The information in this article is provided for informational and educational purposes only.

The information is not intended to be and does not constitute financial advice or any other advice, is general in nature, and is not specific to you. Before using this article’s information to make an investment decision, you should seek the advice of a qualified and registered securities professional and undertake your own due diligence.

None of the information in this article is intended as investment advice, as an offer or solicitation of an offer to buy or sell, or as a recommendation, endorsement, or sponsorship of any security, company, or fund. The author is not responsible for any investment decision made by you. You are responsible for your own investment research and investment decisions.

16
Share this post

ASML Holding ($ASML) Deep Dive

www.from100kto1m.com
7
Share
Previous
Next
A guest post by
Damia Othman
Ex-sell side analyst | global coverage | investment research for own portfolio | financial wellness tips
Subscribe to Damia
7 Comments
Share this discussion

ASML Holding ($ASML) Deep Dive

www.from100kto1m.com
author
Damia Othman
Aug 17Author

ASML share price has been correcting this week. Perhaps providing a good time to accumulate for the long-term. Thank you for featuring my deep dive.

Expand full comment
Reply
Share
2 replies by YZ and others
gere67
Aug 18Liked by YZ, Damia Othman

Great analysis, I own already some shares and like your table with PE and the years. The order book is so big and the investments so huge that I think it is worth making a price projection until 2030! Another Dutch stock I own is smaller an is BESI! Their hybrid bonding technology for chips will be a game changer in 2026

Expand full comment
Reply
Share
3 replies by YZ and others
5 more comments...
Top
New
Community

No posts

Ready for more?

© 2023 YZ
Market data by Intrinio
Privacy ∙ Terms ∙ Collection notice
Start WritingGet the app
Substack is the home for great writing