Zimele Mbanjwa
ASML
"During a gold rush, sell shovels" - Mark Twain
Established in 1984 in the Netherlands, ASML (ASM Lithography) was developed by popular electronics company Philips, in combination with a chip manufacturer named Advanced Semiconductor Materials International (ASMI). In the late '80s, ASMI withdrew from the partnership after significant capital investments bore no fruit, while Philips stayed the course. The business reached a turning point in the early '90s when it released the PAS 5500, its third lithography system, which attracted several large customers and hurled the company into a profit-making entity. Over 90% of these classic lithography systems are still in use at customer fabs today. In 1995, ASML went public, listing on the Amsterdam and New York Stock Exchanges and Philips began divesting from the company.
The 2000s saw ASML continue to scale through revolutionary technological innovations and acquisitions in the semiconductor space to complement and enhance its capabilities. In 2007, the company acquired BRION - a provider of semiconductor design and manufacturing optimisation solutions specialising in computational lithography for integrated circuits. This set forth the group's 'Holistic Lithography' strategy. Holistic Lithography enables chipmakers to develop, optimise, and control the semiconductor production process. Up until this point, ASML's machines were deep ultraviolet (DUV) lithography systems.
In the 2010s, the group introduced the extreme ultraviolet (EUV) lithography tool that can manufacture smaller chip features, resulting in faster, more powerful chips. In 2023, the company shipped the first of its next-generation EUV systems enabling the manufacture of even smaller features quicker, at scale, and at a lower cost.
So, what does ASML do?
As the name suggests, and has been alluded to earlier, ASML manufactures lithography systems critical to the production of the chips required to power modern technology hardware. The hardware, software and services offered by ASML to its customers allow for the mass production of these chips at high precision and at a reduced cost.
One of the key drivers of growth in the semiconductor industry is what is known as affordable shrink. Affordable shrink is the ability to make smaller, more energy-efficient chips at a lower cost. Lithography is a key driver of this process. ASML's holistic approach provides chipmakers with support and solutions at every stage of the chipmaking process, from early design and development to high-volume production.
Holistic solutions - ASML's comprehensive product range
ASML's holistic approach combines lithography systems with computational tools, metrology (the science of measurement and its application) and inspection systems, and process control software solutions.
Deep ultraviolet (DUV) lithography systems account for 45% of ASML's total sales (and 59% of system sales) and they can produce most layers in chips.
Extreme ultraviolet (EUV) lithography systems (29% of sales) use high-resolution lithography at the smallest of scales, thus allowing for the printing of small features on microchips at a high density. This technology is unique to ASML only. Usage of EUV technology is especially common in new generation technologies including what is required in smartphones and wearables, as well as computing - something that is becoming even more important as AI applications expand and advance.
Applications (metrology and inspections systems) allow chipmakers to measure the patterns that they print on the wafer to see how well they match the intended pattern. ASML's solutions enables its customers to monitor most steps of bringing a chip to market, from R&D to mass production. They generate data at the required speed and accuracy for high-volume manufacturing. This supports process control software solutions to create automated feedback control loops.
Installed base system management accounts for ~23% of revenue, and allows the company to offer its clients an extensive installed base management portfolio. Field upgrade packages enable customers to optimise their cost of ownership over a system's lifetime by upgrading older systems to improved models. These enhancements are designed to improve throughput, patterning performance and overlay to optimise the cost of ownership over a system's lifetime.
ASML is the dominant supplier of the semiconductor manufacturing equipment
ASML maintains a dominant position amongst semiconductor manufacturing equipment suppliers. In 2023, it held a ~24% market share in Front-End equipment supply (machinery used in the initial stages of wafer fabrication) and ~4% in Back-End equipment (machinery used in the later stages of chip manufacturing, primarily focused on packaging and testing the processed wafer). It is estimated that in the lithography space, ASML holds a market share of over 80%.
In 1965, Intel founder Gordon Moore hypothesised that the number of transistors in an integrated circuit (IC) would double every two years, meaning that processor speeds double at this rate - a trend that has since been observed. This principal is essential in classifying how rapidly computing power continues to grow. Part of that growth is the ability to shrink chip features, while increasing efficacy. As such, innovative designs, differentiated materials, advanced packaging, and complex structures have been central to the industry's progress. At the core of this is ASML's lithography products, which play a critical role in the affordable mass production of advanced chips, thus ensuring the continuation of Moore's Law.
AI adoption is still in its infancy
The World Semiconductor Trade Stats (WSTS) organisation and the Semiconductor Industry Association (SIA) reported that preliminary numbers show that in 2024 world semiconductor sales were a record $630.5 billion, up 19% y/y, a significant improvement relative to the industry's historical market compound annual growth rate (CAGR) between 2013 and 2023 of just 6%. The strong increase was due to a recovery in chip demand, following a protracted destocking cycle, and led by an acceleration in AI application demand.
One of the key opportunities in AI exists in its continued adoption, which is currently still in its infancy. The boom of AI applications, particularly predictive and generative AI, underpins the surge in demand for advanced semiconductor components due to their rapid and efficient processing power. It is estimated that advanced generative AI chips accounted for ~20% of chip revenue in 2024 but made up less than 0.5% of wafers sold. In a report on AI adoption published in 2024 by the Boston Consulting Group, a survey, which spanned across 59 countries in North America, Asia and Europe, showed that only ~4% of companies across 20 sectors have developed "cutting edge" cross-functional value accretive AI. Another 22% of companies are said to have built some capabilities and developed an AI strategy, with value realisation still minimal. Despite the low penetration, 'The Rapid Adoption of Generative AI', a working paper by the Federal Reserve Bank of St. Louis, concluded that generative AI is being taken up at a faster pace than both PCs and the internet. That is, usage at work and at home was reported by 39% of survey respondents in the first two years, compared to 20% for PCs in the first three years, and 20% for the internet in the first two years as well. Evidently, usage of generative AI technologies is growing rapidly at an individual level, however, innovative usage and integration, particularly at enterprise level, is still minimal.
Looking ahead (2025 to 2030 forecast period)
Looking ahead, current forecasts by industry analysts estimate double-digit market growth in the semiconductor industry in 2025, and a 9% CAGR from 2025 to 2030 to see the industry surpass $1 trillion in sales by 2030. During this period, sales increases will be driven by steep demand for datacentres, servers and storage (+18% CAGR), which will account for ~35% of total demand, and offset single-digit demand growth in smartphones, personal computing, consumer & industrial electronics, automotive, as well as wired & wireless infrastructure. Over this period, wafer demand is projected to grow at a CAGR of 6%, however advanced logic chips (<7 nm) will grow at 19% per annum boosted by AI applications. Advanced logic chips such as CPUs [central processing units] and GPUs [graphics processing units], are the 'brains' of a device. These chips currently account for 61% of current ASML systems usage.
ASML has the advantage of being, as aforementioned, the only producer of EUV technology. At the centre of the group's long-term growth will be its ability to scale its monopolistic EUV technology in a cost-effective manner as it continues to grow its all-round holistic lithography portfolio while leveraging the AI opportunity. ASML's EUV systems have an estimated life cycle of 20 years (with service and upgrades), which are supportive of cost optimisation for end users, while benefitting ASML with additional Installed Base revenue.
End-market demand growth is expected to be robust. ASML expects that advanced logic chips will see a gradual ramp of High NA layers (EUV) exposures over the period, which will lead to an estimated EUV lithography capital expenditure growth of ~15% per annum, while memory chips will grow at ~20% per annum. As such, ASML expects annual revenue between ~€44 billion and €60 billion (12% CAGR from FY24) at a gross margin between ~56% and 60% by 2030 (FY24: 50.5%).
Financial performance and prospects
The company recently released strong 4Q24 and FY24 results for the period ended 31 December 2024.
The upcoming quarter is expected to see sequentially lower revenues driven by lower High NA EUV system sales, while Installed Base Management sales are expected to remain flat q/q. However, margins are expected to expand as volumes are expected to be concentrated on low NA technology. The group believes that High NA revenue will primarily be skewed towards the 2H25. As a result, it is expected that the gross margin in the 1H25 will be a little bit better than the gross margin in 2H25. Nevertheless, full-year expectations of improved margins as well as a 15% increase in revenue, currently ahead of Bloomberg Intelligence estimated growth of chip-making tools revenue of ~5-10% in 2025, is reassuring of industry near-term fundamentals and demand as the group continues to ship products that are critical for the continued ramp up of AI technology.
Summary investment case
Summary investment case
Risks
Consensus outlook and valuation
