Why ASML Stock is a Semiconductor Giant Worth Following

ASML Holdings (ASML 1.14%) is a giant in the semiconductor space that's worth following for several reasons.

In this video from "The Virtual Opportunities Show," recorded on Jan. 18, Fool analyst Asit Sharma delves into the business and highlights a few attractive qualities about this tech stock. 

Asit Sharma: What I am going to do is just take two minutes and return to ASML Holdings. This is the company I talked about two episodes ago which is a specialist in the chip manufacturing field. They use extreme ultraviolet lithography to make chips ever more powerful. That is they compress more and more circuitry on a chip and enable the more well-known chip manufacturers, whoever, Samsung, Intel (INTC 1.77%), etc, to move from one standard to another.

Without them, this process, I think, would take a lot longer. They occupy a very rarefied niche in this space, and they have almost a monopoly position. I'm going to keep talking about ASML a little bit. It's a hard company to wrap one's head around. Here's just a quick view of the financial statements.

I wanted to point out some really quick things here. Let's take a look at this first observation in euros. This is a pretty big company. I think I mentioned this before, Demitri, revenue has gone from €4 billion euros in the three months ended Sept. 27, 2020, to €5.2 billion in the next year. I usually go from right to left, €5.2 billion growth over 4 billion. You see for the nine-month trend, this is also a nice jump.

Here's the quandary for anyone investing in this industry. How long is this type of sustained demand just going to exist? When will be the point that it tapers down and we see a resumption of normal cycles in this industry? I can't help but think that it's going to be stretched out this time. Some of the reason is what we talk about on this show every time we meet, which is the prevalence of virtual opportunities in almost every sphere. I almost think that it's helpful to think of these as maybe super-cycles in the chip industry. I feel like we're within a super-cycle just now. I could be proven very wrong.

Just a few other things here that are of interest to me is its nice tripling of R&D cost. I'd love to see a company which is growing its R&D in excess of its sales, and ASML which produces some pretty specialized equipment in order to conduct this incredibly complex chip lithography has to invest in it. It does quite a bit. I want to just hit two more points here. If we can move down here. I like this increase in gross profit the company is seeing.

It's got some pricing power as chips are more in demand. It's also crossing a threshold that I give as a rule of thumb from my days in auditing and consulting; if you give me an industry blind that's involved in manufacturing, I want that gross margin to be a 50-60% window. Because lower than that, it can be really hard to turn an inventory effectively, it can be hard to generate really good bottom line profits. You hit that 50%, you show me almost any kind of industry and I can prove that out. I like to see that it's really in that sweet spot. I'll be taking a look at that more deeply as I study this company.

I also love that they give the number of payroll employees, employees on their payroll, and full-time equivalents. They've got a bit of a temporary workforce, but you can round these numbers up. That lets those who are interested in dividing market capitalization by the number of employees make that calculation very quickly and compare it to some other companies in the industry, which is something else I'm working on throwing on a spreadsheet, I'll bring it to the show and show you some interesting comparisons with other chip companies. I did want to just breeze through their balance sheet, pretty healthy here. Let's just stick on this right column, this is the most recent balance sheet date.

Quite a bit of inventory you will see, and a lot of receivables. The hallmarks of a big manufacturer, nice cash position, so between that current assets, about $15.71 billion versus $11.6 billion, sorry, non-current assets. Then I always compare this to current liabilities, and current liabilities are here. Let's do rough math. This is about $6.5 billion in working capital against $4.1 billion in debt. Really, really healthy balance sheet and that leaves plenty of money for further reinvestment. I like the financial profiles, just some big picture things that I think about that are unique to an industry.

Not a huge goodwill balance too for a company that's done some acquisitions, $4 billion dollars out of total tangible and intangible assets of that $11.7 billion. Net equipment after depreciation of only $2.7 billion, so there's that capital efficiency that we always talk about. This is a company that invests in amazing machines to build chip writing machines and yet the net assets on its books, net fixed assets are only $2.7 billion bucks. There's a lot that you can see at a glance in this company, which is extremely interesting and intriguing if you're into working backwards from financial statements