ASML’s role in the semiconductor sector

The semiconductor sector has been in the focus of many investors for several years because it is becoming more and more important to our economies every day, and any bottleneck in the industry can paralyze entire sectors. However, there is a company that, despite its importance, is not given the attention it needs. This is ASML (ASML.NL), and we are going to analyze it in depth.

You can download the full thesis by clicking here.

First of all, we should note that the semiconductor and chip sector has become very important in the global economy, because today most of the goods are already domestically. In fact, the level of demand for semiconductors is increasing, and They have to be more specialized, more efficient and smaller in size, which has increased the demand for them almost exponentially. The market size is estimated to be one trillion dollars by 2030, which represents growth of about 8% annually

Global sales of semiconductors

Source: Own development with data from World Semiconductor Trade Statistics

It is not only about computers, but other sectors also require semiconductors to be able to continue to advance in-house developments. This is the case of the automotive sector, which, due to the transition to electric vehicles, needs the latest technology chips that manage the transmission of electricity throughout the car and control the electric motor.

Semiconductor sales by sector in 2022

Source: Own development with data from the Semiconductor Industry Association

Here we present one of the keys to this thesis. And since the level of demand for microcircuits is high and they need to be faster and more efficient, investments in the semiconductor sector are very large. This is necessary in order not to be left out of the race, which seems to have no end Companies must invest to have the latest possible technology.

In this sector we find various agents such as chip companies, foundries (which produce silicon wafers for chips) and semi-conductor equipment manufacturers, which are forgotten but fundamental.

Europe’s ASML falls into the latter category, as it makes the necessary machines for lithography, the process by which patterns are etched onto silicon wafers and is what enables the chip to function.

In particular, there are several lithography systems, among which we highlight the following:

  • DEADLINE: This system is able to etch patterns on a silicon wafer to produce 7-nanometer (nm) chips and is cheaper than others
  • EUV: This stellar lithography technology uses extreme UV rays and has been in development for years. It is able to etch wafer patterns for chip manufacturing at around 2nm with the best resolution to date.. This allows us to produce the most advanced chips in the industry with the best performance and energy efficiency. However, it is an expensive technology that consumes a lot of energy, in addition to being slower than DUV.. A car with this technology could cost upwards of $150 million, so the rollout is gradual
  • ZERO: prints a pattern on a silicon wafer, and although it was abandoned years ago, it has developed significantly with Canon, suggesting that by the end of 2024 it may have a machine that prints patterns for 5nm chips more efficiently than EUV and with lower energy costs. In addition, the car will cost about 15 million dollars. The problem is that it is much less efficient than EUV in a sector where efficiency is key

ASML has both DUV and EUV technology, although the latter is clearly the company’s bet. in fact, It took the company 20 years to develop EUV systems, but it allowed it to have a monopoly on the equipment that would drive the sector into the future. For this reason, companies such as Intel, Samsung or TSMC are highly dependent on ASML’s success in EUV development, as they are their main customers and require the highest possible efficiency to satisfy their consumers.

ASML has several areas of activity, which we can summarize as follows:

  • EUV: As we mentioned, this is a star product that will allow it to continue to grow at a high rate. This technology will continue to reduce the size of the chip. Specifically, 1nm is estimated to be reached in 2028, 0.7nm in 2030, and 0.2nm in 2036, all dependent on manufacturers’ acquisition of ASML technology. The new 3800E model is designed for 2nm nodes, increasing performance by approximately 15%. Orders for equipment with this technology increased by 65% ​​in the last quarter of 2023, which will increase sales in the second half of 2024.
  • DEADLINE: In this case, the competition is greater, but the technology is still better than that of other companies. In addition, it will continue to be used for other types of chips that do not require a smaller size, although it will shrink little by little.
  • Installed base: This is the service part where he maintains the machines sold and tries to include certain improvements to improve the performance of his customers. This segment is necessary because this way manufacturers will continue to develop smaller chips and thus demand more ASML products. This also includes specialized software.
  • Metrology and control: These are systems that allow you to measure the quality of plates and the presence of defects in them. This is the least relevant.

Source: Own development with data taken from company reports

The company still focuses most of its sales in DUV, but that percentage will decline as its customers adopt EUV technology and chip sizes become smaller.

For all these reasons, ASML is a quality company that we should pay attention to and evaluate.

Little can be said about its financial position, as its net cash is 2,230 million euros and its debt repayments are very well spread over the coming years. In addition, Between 2016 and 2023, it grew by 22.1% in annual revenue and 25.9% in operating profit, which also achieved an increase in margins.

Source: Own development with data taken from company reports

Based on this data and the evolution of the sector, we predict that sales will recover in 2025 with the adoption of EUV technology. You can see the rest of the assumptions in the full thesis, which you can download from the link we left you at the beginning of the article.

We use discounted free cash flow and valuation multiples to estimate the target price. From our point of view, The margin of safety in both cases is very small., because the company trades at very high multiples. At this point, we think this company is worth watching very closely and paying attention to the price drop.

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