Where Will ASML Be in 5 Years?

ASML Holding's (ASML 1.46%) stock price rallied roughly 460% over the past five years. The Dutch company's sales and profits continually climbed as the expansion of the semiconductor market boosted sales of its lithography systems, which are used to print circuit patterns onto silicon wafers.

ASML controls about 90% of this market, making it a crucial cog in the semiconductor industry, and its top customers include the world's top foundries: Taiwan Semiconductor Manufacturing (TSM 1.60%), Intel (INTC 0.61%), and Samsung. The semiconductor market will probably keep expanding with the cloud, artificial intelligence, 5G, and Internet of Things markets, but can ASML continue to generate multibagger gains over the next five years?

Image source: Getty images.

Revisiting the past five years

Back in 2016, ASML aimed to generate 10 billion euros ($11.95 billion) in annual revenue by 2020. It easily surpassed that goal in 2018, and it generated 14 billion euros ($16.7 billion) in 2020.

Data source: ASML. FY = fiscal year. YOY = Year over year.

ASML's gross margin also consistently expanded and suffered only a slight dip in 2019 amid the cyclical slump in memory chip sales, and its ongoing buybacks boosted its earnings per share.

Data source: ASML. FY = fiscal year. YOY = Year over year.

ASML generates stable growth because the world's most advanced foundries can't produce chips without its photolithography systems. It also developed its top-tier extreme ultraviolet (EUV) systems, which are used to produce the smallest 5- and 7-nanometer chips, over the past two decades -- which gives it a wide moat against smaller competitors that produce lower-end systems.

ASML's margin is expanding as it sells a higher mix of these EUV systems. Its total EUV sales rose 59% in 2020, accelerating from its 49% growth in 2019, and accounted for 43% of its top line.

Previewing the next five years

At its last investor day in 2018, ASML set a fresh target of generating 15 billion to 24 billion euros ($17.9 billion to $29.9 billion) in revenue by 2025. It will probably exceed the low end of that forecast this year since analysts expect its revenue to rise 32% to 18.5 billion euros ($22.1 billion).

Image source: ASML.

ASML will probably offer a new forecast at its next investor day this June, but I believe it will easily generate more than 24 billion euros in annual revenue before 2025, for three simple reasons.

First, its biggest customer, TSMC, intends to boost its capital expenditures (capex) by up to 63% this year to maintain its lead in the "process race" to create smaller and more power-efficient chips.

Samsung and its South Korean chipmaking peers are also likely to increase their average capex by more than 20% this year. A lot of that spending will go toward new lithography systems.

Second, ASML plans to launch more advanced EUV systems, called high-NA systems, to succeed its current generation of multi-patterning EUV systems over the next few years. High-NA systems will be used to manufacturing the smallest 3- and 2-nanometer chips between 2022 and 2025.

TSMC is currently developing 3-nanometer chips, which are expected to enter mass production in 2022, and it's constructing a new plant in Taiwan to develop 2-nanometer chips. ASML's roadmap directly aligns with TSMC's plans -- it will launch its first high-NA EUV system in 2022, followed by a faster version in 2024.

Lastly, the cyclical recovery of the memory-chip market, which started last year, could continue for the foreseeable future. ASML expects the world's top DRAM makers to gradually pivot from the older deep ultraviolet systems to the newer EUV systems to manufacture more advanced types of memory.

So where will ASML be in five years?

ASML's stock might look pricey at nearly 40 times forward earnings, but I believe its near-monopoly in lithography systems, its sticky customer base, and its clear roadmap all justify that slight premium.

I'm not sure if the stock will surge another 400% to 500% over the next five years, but I think it will outperform the broader market. That's why I recently accumulated more shares of ASML during the latest tech sell-off, and why I believe it's one of the best long-term plays on the semiconductor market.