ASML Holding (ASML -0.53%) is the world's only manufacturer of extreme ultraviolet (EUV) lithography systems. The semiconductor market's most advanced chip foundries -- including Taiwan Semiconductor Manufacturing (TSM -0.13%), Samsung, and Intel (INTC -0.18%) -- all use the Dutch company's $150 million EUV systems to etch circuit patterns for their smallest and densest chips.
ASML doesn't face any competitors in this crucial market because it perfected the complex technology over the past three decades. It's also far too expensive for other lithography companies to enter this high-end market.
ASML was spun off from Philips (PHG 1.92%) as a public company in 1995. But it only shipped its first experimental EUV system in 2010 -- and it didn't meaningfully ramp up its commercial shipments until 2016.
If you had invested $10,000 in ASML at the beginning of 2010, your investment would be worth over $150,000 today. Let's take a look back at ASML's growth over those nine years, and see why it could still have more room to run.
The birth of a new market
But in 2013, ASML bought Cymer, a San Diego-based lithography technology company, to accelerate its development of its EUV systems. It shipped its second-generation NXE:3300 EUV system later that year, followed by its third-generation NXE:3350 EUV system in 2015.
ASML continued to upgrade its other lithography technologies by buying Hermes Microvision (HMI) in 2016 and Mapper's intellectual property assets in 2018. It also clashed with Nikon in a series of patent infringement lawsuits between 2017 and 2019 -- which was eventually settled by a cross-licensing agreement between the two companies.
ASML still competes against Nikon and Canon in the older deep ultraviolet (DUV) lithography systems market, but it's monopolized the high-end market for EUV systems -- which cost significantly more than DUV systems. As a result, BOCI Securities estimates that ASML accounted for 91% of all lithography sales in 2020, compared to just 6% for Nikon and 3% for Canon.
In 2021, ASML sold 309 lithography systems, including 42 EUV systems. Between 2010 and 2021, its annual revenue grew at a compound annual growth rate (CAGR) of 13.8%. Its annual gross margin expanded from 43.4% to 52.7%, while its earnings per share rose at a CAGR of 17.9%.
Why ASML still has more room to run
The global chip shortage has caused TSMC, Samsung, and Intel to all ramp up their orders of ASML's EUV systems -- and ASML is shipping them as quickly as it can manufacture them. ASML also plans to gradually roll out its new high-NA EUV systems, which will enable those foundries to manufacture even smaller chips, between 2022 and 2025.
During its investor day presentation last September, ASML predicted it would generate 24 billion euros ($27 billion) to 30 billion euros ($33.7 billion) in revenue in 2025. The midpoint of that forecast implies a CAGR of 9.8% from 2021 to 2025. However, investors should also recall that ASML actually surpassed its 2018 investor day targets four years ahead of schedule -- so it could be sandbagging that long-term guidance again.
The low end of ASML's forecast, which calls for 313 lithography system shipments in 2025 (including 48 EUV and five high-NA systems), implies the market's cyclical appetite for new chips will wane as the leading foundries resolve the global chip shortage. The high end of that forecast, which calls for 452 lithography system shipments in 2025 (including 70 EUV and five high-NA systems), is based on the belief that the secular expansion of newer markets (like 5G, cloud, and artificial intelligence) will support a prolonged "super cycle" in chip upgrades.
Both scenarios indicate ASML's business will continue to grow, and analysts currently expect its revenue to rise 20% in 2022 and 12% in 2023. Those stable growth rates, along with ASML's monopolization of a key piece of chipmaking technology, indicate its stock still has lots of upside potential.