The global chip shortage, which started in late 2019 and worsened throughout the pandemic, turned ASML (ASML -3.32%) into one of the world's most-talked-about semiconductor equipment makers.
The Dutch company is the world's largest producer of lithography machines, which are used to etch circuit patterns onto silicon wafers. It's also the only manufacturer of EUV (extreme ultraviolet) lithography systems, which are required to create the smallest technology chips.
ASML only ships a few dozen EUV systems a year, which cost over 120 million euros ($139 million) each. They are shipped to the largest chip foundries worldwide. That makes it a crucial supplier for TSMC (TSM -3.45%), Samsung, and Intel (INTC -2.40%), and a linchpin of the global semiconductor market.
Image source: ASML.
Over the past two years, ASML's stock more than tripled as investors realized it would profit from the global chip shortage. The stock closed at $745.11 a share on Thursday up from the $640 a share it traded for back in early April. But some investors might be wary of chasing that rally since ASML's stock now trades at nearly 40 times forward earnings and 18 times this year's sales.
However, ASML held its latest investor day on Sept. 29, and it presented even more reasons to stay bullish. Let's review the highlights and see why everyone is still talking about ASML's stock.
There's a rosier outlook for 2025
During ASML's last investor day in 2018, it set a target of generating 15 billion euros ($17.4 billion) to 24 billion euros ($27.9 billion) in revenues in 2025. But this time, it expects to generate 24 billion to 30 billion euros ($34.8 billion) in revenue in 2025. That forecast implies its annual revenue, which hit 14 billion euros ($16.2 billion) in 2020, could more than double within the next four years.
Back in 2018, ASML expected its gross margin to exceed 50% by 2025. It now expects to post a gross margin of 54%-56% in 2025, compared to its gross margin of 48.6% in 2020.
How does ASML plan to hit those targets?
ASML's new revenue forecasts for 2025 are modeled on "low" and "high" projections for the semiconductor market, which will impact its total shipments of lithography systems.
The company's EUV systems are currently used to manufacture the world's smallest 7nm to 5nm chips, and will also be used to manufacture the upcoming generation of 3nm chips. But to manufacture even smaller chips, TSMC, Samsung, and Intel will all need to use ASML's next-generation high-NA EUV systems.
In a low market scenario, the cyclical demand for chips could cool off after the current round of plant upgrades. If that happens, ASML expects to sell 313 lithography units in 2025, including 48 EUV systems and five high-NA systems. Lower-end systems will account for the rest of its shipments.
In a high market scenario, the secular expansion of newer markets -- including 5G networks, data centers, and the Internet of Things -- could spark a "supercycle" of chip upgrades that lasts much longer than previous semiconductor growth cycles. In this scenario, ASML expects to ship 452 lithography systems in 2025, including 70 EUV systems and five high-NA systems.
Both scenarios would represent significant growth from 2020 when it sold 258 lithography systems (including 31 EUV systems). ASML hasn't set an exact launch date for its high-NA systems yet, but they're expected to arrive in time to support TSMC's planned development of 2nm chips in 2023.
ASML's new gross margin target should be achievable since its near-monopoly gives it unmatched pricing power. That's why ASML's gross margin more or less expanded consistently over the past several years:
|
Fiscal Year |
2016 |
2017 |
2018 |
2019 |
2020 |
|---|---|---|---|---|---|
|
Gross Margin |
44.8% |
44.9% |
46% |
44.7% |
48.6% |
Source: ASML.
Should you pay a premium for ASML's stock?
ASML's business is currently firing on all cylinders, but investors should be aware of two big risks. First, the aggressive attempts by TSMC, Intel, and Samsung to resolve the current chip shortage could result in a chip surplus in 2023, according to IDC. If that happens, ASML's growth will stall out.
Second, ASML's high-NA systems will push EUV technologies to their technical limits. This puts a lot of pressure on ASML to develop new technology for even smaller chips -- which could be very challenging since it took approximately three decades for ASML to develop its EUV systems.
Those challenges, along with ASML's rising valuations, could limit its returns over the next four years. But I personally believe ASML's strengths still easily outweigh its weaknesses, and it remains one of the best ways to invest in the secular growth of the semiconductor market.
