In this note we answer frequently asked questions from investors about chip machine manufacturer ASML ASMLwhose share price has been volatile this week following a premature earnings release:
• Current valuation and why the stock is now undervalued
• Intel’s cost-cutting plans
• Future relationship with TSMC
• High-NA EUV equipment
• China and trade tariffs
We also include comments from the analyst call on the quarterly results.
1) What is priced into ASML’s current share price?
The share price implies that ASML’s financial performance in 2030 is in line with the worst-case scenario mentioned during the 2022 Investor Day. This means €46.7 billion in revenues in 2030 (2030 guidance is €44-60 billion ), 56% gross margins (guided range of 56%-60%) and €8.2 billion in R&D plus operating costs (guided range of €7.6-8.2 billion). This scenario seems too pessimistic to us, which means that the selling wave is a buying opportunity.
Morningstar benchmarks for ASML shares
• Fair Value Estimate: €850
• Morningstar Rating: ★★★★
• Economic Moat: Wide
• Morningstar Uncertainty Rating: High
2) What will revenue growth look like over the next decade?
ASML’s revenue growth will come from higher volumes, higher sales prices and growth in service revenues. It is a given that lithography intensity is slowing, therefore investors should not expect the same growth from ASML in the future as in the past decade (22% CAGR from 2016-23). Still, we assume that ASML will generate revenues in the high to low range over the next ten years, thanks to more factories, more systems per fab, higher sales prices and growth in service revenues.
Despite the slowdown of Moore’s Law, ASML is still managing to reduce chip resolutions which, along with new transistor architectures such as gate-all-around, or GAA, and CFET after, will require more lithography intensity. As ASML improves not only the technology but also the productivity of its machines, it can charge higher prices to its customers. For example, if equipment prices increase by 20%, but productivity increases by 40%, the cost per wafer for the chip manufacturer will still decrease.
Newer machines such as the NXE:3800E, now being introduced, also deliver higher gross margins due to their higher price and cost-efficiency by leveraging several existing EUV, or extreme ultraviolet, product platforms. EUV service is another lever that ASML can use to improve gross margins. EUV’s gross margins are still dilutive to the group because it is a less mature platform than DUV, or deep ultraviolet, whose services gross margins are higher than those of the group as a whole. As happened with DUV two decades ago, ASML is gradually improving its EUV service margins by developing expertise, improving machine uptime and upselling services, software and upgrades. Over a 30-year lifespan, an EUV unit can generate 1.5 times or more service revenue compared to equipment revenue, compared to 1.3 times for DUV.
3) What effect do Intel’s problems have on ASML?
Intel is probably ASML’s third largest customer, after TSMC and Samsung. While performance can vary widely from year to year, we estimate that Intel represents between 10%-20% of ASML’s revenues. At the beginning of September, Intel announced a 20% reduction in its investments and while we don’t have a full overview, we can assume that this has affected ASML’s orders. Intel has also postponed the start of construction of its factory in Magdeburg, Germany, which is EUV intensive (both Low and High NA), until 2025 at the earliest, and we wouldn’t be surprised to see more delays given Intel’s challenges .
We think Intel’s problems are more relevant in the short term and less relevant in the long term. The technological and operational gap between TSMC and its competitors Intel and Samsung is widening. Should Intel factories experience more delays, or should Intel be unable to deliver on its promises in the coming years, we expect someone else, likely TSMC, to pick up the needed additional supply of chips.
4) Will TSMC become an even bigger customer?
Yes. On top of Intel’s specific issues, Samsung published a letter to shareholders and customers on October 8, apologizing for not meeting expectations and citing technological competition as one of the key areas to improve. We believe that Intel and Samsung’s integrated business model is inherently more difficult than, and at a disadvantage to, TSMC’s manufacturing-only business model, because the complexity of designing and manufacturing chips simultaneously is enormous.
Some Intel and Samsung customers might be skeptical about sharing their chip designs with these companies because they might fear that their designs will be copied if there is not proper separation between design and manufacturing activities. Because TSMC is a manufacturer-only company, the company does not have to deal with the complexities of chip design and can focus on maintaining its position as the world’s best manufacturer. Since TSMC is likely to gain market share from its peers, it should become a bigger customer for ASML.
Since the start of 2020, TSMC has represented an average of 33% of ASML’s revenue, with huge variations between quarters given the volatile nature of ASML’s business. If TSMC becomes an even bigger customer, it could try to put more pressure on ASML to lower the price of its equipment. While both companies have so far refrained from putting pressure on each other, we think this is an important long-term risk to monitor. ASML’s best strategy to offset this risk is to continue delivering productivity improvements, which it has done successfully to date. The improved productivity of the NXE:3800E, together with the High-NA EUV EXE:5000, which will have a productivity of 220 wafers per hour by 2025, up from 185, serves as good evidence. TSMC’s strategy to extract more value from its supply chain involves not only putting pressure on ASML, but also raising prices for customers, as the company reportedly did with Nvidia in the summer.
5) ASML’s High-NA EUV: what is it?
TSMC and Intel have already ordered their first High-NA EUV tools, which are not yet used in volume production but only in an R&D environment, and we expect Samsung to follow suit soon.
A modern chip contains dozens of lithography layers. The deepest layers are the most critical, because this is where most computational activity takes place, while more superficial layers are less critical. In many cases, not all layers need EUV technology, only the deepest ones, and a more mature technology such as DUV is good enough, and cheaper, for the more superficial layers.
For advanced chips made at leading nodes, most EUV layers can still be printed with layer-NA EUV dual patterning equipment. Double patterning means that the wafer is exposed to the EUV light twice instead of once. However, as cartridges become smaller and the industry moves to new transistor architectures such as gate-all-around, the defect rates of using dual cartridges with low-NA EUV increase and at some point high-NA EUV becomes cheaper, faster, and delivers fewer defects. According to Digitimes, TSMC will start producing high-NA EUV in large volumes in 2028, although we believe this schedule could be pushed back or forward slightly.
Investors often ask how chip manufacturers are willing to pay €180 (Low-NA) to €350 (High-NA) million for ASML’s EUV machines. Semiconductor foundries do not look at the price of the machine itself, but at the price per wafer produced. Foundries have huge fixed costs, so higher productivity means higher operating leverage and lower costs per unit. Over the past ten years, ASML has proven that it can deliver not only on the technological side, but also on the productivity side. ASML’s new NXE: 3800E (low-NA) is the best example of this. While previous generations of machines like the NXE:3600D had an output of 160 wafers per hour, the NXE:3800E achieves 220, an improvement of 37.5%. This saves costs for foundries, so ASML can justify charging higher prices.
ASML also delivers in this area for high-NA EUV. The EXE:5000 will improve from 185 wafers per hour to 220 by 2025, a performance equal to that of the NXE:3800E. ASML knows how important this is to its customers and we expect the company will continue to focus on delivering productivity improvements to reduce costs per wafer for customers. Now that ASML has several EUV product platforms, it can improve cross-compatibility, with machines sharing parts and systems, reducing design complexity and costs and improving lead times.
6) What is the situation regarding China?
Given the news flows over the past two years, we think it is more likely that restrictions will go up rather than down. In our opinion, the US still has effective power to restrict ASML’s exports. To the extent that ASML’s machines contain American components, such as the critical light source produced in San Diego, California, the US has effective power to restrict ASML’s exports and put pressure on the Netherlands. Management noted that it expects China to decline from 50% in the first nine months of 2024 to approximately 20% of total sales in 2025. This normalization of sales was known to investors because management has discussed it before . ASML believes that China is the only country in the world adding semiconductor capacity for mature applications such as automotive or industrial, which are also growing.
In the short term, the impact of China on ASML’s activities is relevant. Over a 5 to 10 year horizon, China becomes less important as we expect EUV to represent more than 70% of ASML’s revenues by 2030 (which China does not participate in) and even a higher percentage of profits as EUV has better gross margins, average sales prices and service revenue potential. We estimate that China will represent 15% or less of ASML’s revenues by 2030.
7) Comment from ASML’s results call
When asked how many EUV systems will be pushed to 2026 given weaker demand in 2025, management did not provide a clear answer. ASML expects that some systems will be pushed to 2026, but there is still uncertainty because it is still early to tell. We expect low-NA EUV shipments to be in the 60s to 60s in 2026, up from around 50 in 2025, which is the main contributor to our forecast of 13% revenue growth in 2026.
Management also noted that the slower demand for its tools is a combination of both sluggish consumer segments, such as PCs and smartphones, as well as customer-specific issues around technology node developments. We suspect that this last comment mainly concerns Intel and Samsung. If technology problems persist or worsen, they could take years to resolve and create a potential supply-demand imbalance given the multi-year timelines associated with building a new semiconductor factory.
Chip Talk: ASML’s Rollercoaster Ride
Welcome aboard the chip factory rollercoaster! Buckle up, because we’re going to take a look at the ASML fairground, where the stock is as unpredictable as a cat on a hot tin roof!
1) What is Pricing into ASML’s Current Share Price?
At the moment, if you squint hard enough at ASML’s share price, it feels like it’s presenting a nightmare version of “ASML: The Worst-Case Scenario: The Movie”. €46.7 billion in revenues by 2030? Some believe that’s as credible as finding a unicorn at a tech conference! The pessimism is palpable, but keen-eyed investors might see this as a buying opportunity. Buy low, sell high, am I right?
• Fair Value Estimate: €850
• Morningstar Rating: ★★★★
• Economic Moat: Wide
• Uncertainty Rating: High
2) What Will Revenue Growth Look Like Over the Next Decade?
So, if revenues are your fancy, you ought to know that ASML isn’t going to grow the way it did between 2016 and 2023; we’re looking at a potential slow dance rather than a wild rave. But don’t bring out the tissues yet! With more factories and pricier machinery, the numbers could still boogie! Expect a lot of shouting, like, ‘Moore’s Law who?’ And fear not—ASML is turning some heads with its productivity improvements—like charging high prices with low costs per wafer. It’s like selling champagne at the price of soda, but don’t ask where the sugar went!
3) What Effect Do Intel’s Problems have on ASML?
Ah, Intel—the third wheel of the ASML love triangle with TSMC and Samsung! They’re obviously not going through their best phase right now. With a lovely 20% reduction in investments, let’s just say their roadmap looks more like a doodle by a toddler. Intel’s troubles may send a few ripples through ASML’s waters, but the big picture still looks rosy, sort of like a romantic comedy where the nerdy guy gets the girl!
4) Will TSMC Become an Even Bigger Customer?
It’s like the saying goes: “When Intel sneezes, TSMC catches the contracts!” With Intel’s woes, TSMC is set to snag even more market share. This fab doesn’t just get the chocolates; it’s packing the whole box! But watch this space—there’s a risk TSMC could get clever and squeeze ASML for discounts. A classic case of “please don’t make me take my ball and go home!”
5) ASML’s High-NA EUV: What Is It?
Oh, the High-NA EUV—a fancy term that sounds like something out of a sci-fi movie! Picture this: chips sporting layers as complex as an onion but far less tear-inducing! This technology might just be the golden ticket for some companies looking to produce like pros. If they can get this right, productivity will go through the roof. Hold onto your wallets, because these machines aren’t cheap—but hey, they get stuff done!
6) What Is the Situation Regarding China?
Now let’s chat about China, and before you grab your popcorn, it’s not the fairy-tale ending we all want. The fear is that the US might tighten the noose on exports further. ASML’s management expects a major dip in sales revenue from China over the next few years. As the East winds down, the West might just pick up the slack. Less China means more room for EUV to strut its stuff! But don’t hold your breath—long-term forecasts can have more twists than a kayaker in a whirlpool!
7) Comment from ASML’s Results Call
Finally, in the world of earnings calls, the suspense is thick enough to cut with a knife! Management is keeping mum on the specific number of EUV systems delayed to 2026. It’s like trying to get a straight answer out of a politician! While they cautiously hint at growth, the uncertain landscape leaves investors teetering on the brink. It’s the perfect cliffhanger, but let’s hope the sequel isn’t a snooze-fest!
And there you have it, folks—a quick and cheeky whirlwind tour through the ins and outs of ASML’s recent market antics. Remember, in investing, things can change faster than a comedian with a punchline. Stay sharp and keep your eyes peeled!
