ASML (ASML +9.12%) was one of the hottest tech stocks of 2021. The Dutch semiconductor equipment maker's shares skyrocketed nearly 70% over the past 12 months as the global chip shortage highlighted the indispensable nature of its lithography systems, which etch circuit patterns onto silicon wafers. ASML is the world's largest supplier of lithography systems, and it's the only manufacturer of high-end extreme ultraviolet (EUV) systems, which are used to produce the market's smallest and most advanced chips.
Semiconductor foundries like TSMC (TSM +6.30%), Samsung, and Intel (INTC +11.65%) need a constant supply of ASML's EUV machines, which cost about $150 million each and require multiple planes to ship, to address the market's insatiable appetite for new chips. ASML doesn't face any competitors in the EUV market for two simple reasons: It's spent more than three decades developing the technology, and it's prohibitively expensive for smaller lithography companies to enter this capital-intensive market.
ASML's market dominance enables it to generate stable revenue growth with expanding gross margins. It also plans to maintain its dominance with new high-NA EUV systems, which will enable the world's top foundries to manufacture even smaller chips over the next few years. Could that resilient business model turn ASML into a trillion-dollar company by 2030?
Image source: Getty Images.
Could ASML triple in value in less than a decade?
Over the past 10 years, ASML's stock has soared about 1,400%. The company is worth 295 billion euros ($334 billion) today, so it would need to triple its market value over the next eight years to become a trillion-dollar company.
Simple math suggests this could easily happen. Between 2010 and 2020, ASML's annual revenue increased at a compound annual growth rate (CAGR) of 12%. If it grows at the same CAGR from 2020 to 2030, its annual revenue would more than triple from 14 billion euros ($15.9 billion) in 2020 to nearly 44 billion euros ($49.8 billion) in 2030. Assuming its valuations remain roughly the same, it could join the 12-zero club by the end of the decade.
But that bar could be too low
During ASML's investor day presentation in September, it predicted it would generate 24 billion to 30 billion euros ($34 billion) in revenue in 2025, compared to its prior forecast of just 15 billion euros. The midpoint of that new forecast (27 billion euros) implies ASML's revenue could actually increase at a CAGR of 14% between 2020 to 2025.
However, investors should recall that ASML sandbagged its guidance before. During its investor day presentation in 2016, it predicted it would generate just 10 billion euros ($11.3 billion) in annual revenue by 2020. It easily surpassed that goal by four billion euros. Therefore, investors shouldn't be surprised if ASML exceeds the high end of its own guidance in 2025.
What are the near- to mid-term catalysts?
ASML sold 258 lithography systems, including 31 EUV systems, in 2020. It expects its sales of EUV systems to rise as chipmakers produce more 7nm, 5nm, and 3nm chips. By 2023, it will likely roll out a few high-NA systems to enable foundries to manufacture even smaller chips beyond the 2nm node.
During ASML's last investor day, it presented "low" and "high" scenarios for the market in 2025. In a low market, the global chip shortage will ease and foundries will purchase fewer systems. In a high market, the secular growth of newer technologies -- such as 5G networks, data centers, cloud services, driverless cars, and Internet of Things (IoT) devices -- will spark a "super cycle" in chip demand that will last much longer than previous cycles. Micron's (MU +7.89%) latest earnings report suggests that "super cycle" will continue long after the industry resolves its supply chain issues.
Here's how ASML's low (24 billion euros) and high (30 billion euros) estimates for its 2025 lithography system shipments currently look:
|
Market Scenario |
Total Systems |
EUV |
High-NA EUV |
|---|---|---|---|
|
Low |
313 |
48 |
5 |
|
High |
452 |
70 |
5 |
Data source: ASML.
Simply put, ASML's shipments will keep rising, and it will remain a linchpin of the global semiconductor market for the foreseeable future.
What are the longer-term catalysts?
From 2025 to 2030, EUV and high-NA EUV systems will likely account for a growing percentage of ASML's total system shipments. These systems are more expensive than ASML's lower-end systems, and they can be sold at much higher gross margins.
ASML already expects that trend to boost its annual gross margins from 48.6% in 2020 to 54% to 56% in 2025. That expansion should continue throughout 2030, and generate even more cash for its buybacks and dividends.
ASML might suffer a few cyclical slowdowns over the next nine years, as it did during the memory market's downturn in 2019, but its long-term growth prospects still look promising. Therefore, I firmly believe ASML could easily triple in market value by 2030 and become a trillion-dollar company.
