Top semiconductor equipment player ASML Holdings (ASML -3.32%) is known for its monopoly on the most advanced extreme ultraviolet (EUV) lithography technology. However, investors shouldn't discount its deep ultraviolet (DUV) machines, which are used on less advanced nodes.
After all, ASML ships far more DUV machines than EUV, and DUV machines make up as much revenue as EUV these days for the semiconductor giant.
Fortunately for ASML, DUV adoption is also having a renaissance. Here's why that's good for ASML, but perhaps not as good news for the buyers of those machines, such as Texas Instruments (TXN -2.44%).
The current shortage on lagging-edge nodes
Lagging-edge chips are seeing an explosion of demand right now. These include sensors, power integrated chips, and microcontrollers -- the very types of chips Texas Instruments specializes in.
This is due to the simultaneous uptake of industrial automation and the Internet of Things, as well as more electrified and autonomous vehicles, in addition to traditional use cases for these chips in servers, phones, and computers.
Even if the economy slows down, these digitization trends certainly aren't, and the industry seems to have been caught flat-footed with regard to the needs for lagging-edge chips coming out of the pandemic.
That's caused lagging-edge chipmaking giants such as Texas Instruments and Europe's STMicroelectronics (STM -2.55%) to ramp up their capital investments in a big way. STMicroelectronics has said it would double its capital expenditures to $3.6 billion this year, and TI has said it would look to spend $3.5 billion on capex annually through 2025. That's $1 billion more than analysts were projecting, and equates to a high-teens percentage of revenue, in contrast to TI's 5% investment level over the recent past.
The other reason capex costs are going up
In addition to high demand, these lagging-edge chip companies also need to buy new machines, whereas in the past there were usually lower-cost used machines available for sale.
This is because lagging-edge fabs used to be able to buy used machines from leading-edge fabs. However, with capital intensity going up – more machines and process steps are needed to make a leading-edge chip -- there aren't many used machines available from leading-edge fabs anymore.
The memory industry also used to be a significant source of supply. Memory chips are somewhat of a commodity, and historically underwent severe boom-and-bust cycles. When DRAM memory companies used to go bankrupt, or they were bought by other DRAM companies, excess capacity in the form of stranded DRAM fabs used to come onto the market. Texas Instruments therefore used to be able to buy bankrupt DRAM fabs for pennies on the dollar, boosting its capacity in a highly cost-efficient manner.
However, since the mid-2010s, the DRAM industry has consolidated to just three major players, and the NAND industry to about five. These remaining companies are much stronger than in the past, and the remaining players are doing a much better job of controlling supply. So while the industry is still cyclical, there aren't any major memory players going bankrupt anymore. Therefore, that source of used machine supply for TI and STM is also drying up.
ASML's DUV demand is surprising to the upside
ASML management has said demand for DUV machines next year reached 600, while ASML only has capacity for 375. Therefore, even if there is a slowdown in the semi industry, it appears ASML can still ship everything it can make for the next few years.
Management said it will update its 2025 outlook this November, which will likely increase the figures given last September at its 2021 analyst day. At the time, management projected revenue between 24 billion and 30 billion euros, yielding between 8.5 billion and 10.5 billion euros in earnings. However, given management's comments since then about its undercapacity relative to demand, look for those projections to get revised up.
In the current semiconductor and market downturn, ASML looks like a name that should grow through any softness. Given that the stock is still down about 40% from all-time highs, it looks like a great name to stash away for long-term oriented growth investors.
And while Texas Instruments investors may not enjoy the news about higher costs, the silver lining is that TI's top line should grow faster this decade than it did during the 2010s. Additionally, TI just raised prices to customers, flexing its pricing power and competitive advantage.
So while this development is certainly better for ASML than TI, both companies stand to benefit from the surge in lagging-edge chip content over the course of the 2020s.
