Back in May, Nvidia became the first chipmaker to reach a trillion-dollar market cap. The rapid expansion of the AI market over the past year, which lit a fire under its data center GPU business, pushed it past that milestone.
Nvidia's rapid growth prompted many investors to search for the next chipmaker that has a shot at joining the 12-zero club. However, Nvidia's closest competitors -- Intel and AMD -- only have a combined market cap of about $300 billion and face tough near-term challenges in the PC market. TSMC, the world's most advanced contract chipmaker, would still need to more than double its current market capitalization to reach $1 trillion.
Image source: Getty Images.
So instead of focusing on those obvious choices, I'll explain why ASML (ASML 2.04%) -- which is worth about $260 billion today -- has a much clearer path toward quadrupling its market cap to at least $1 trillion within the next 10 years.
What does ASML do?
ASML is a Dutch company that produces photolithography systems for etching circuit patterns onto silicon wafers. It's the world's leading manufacturer of deep ultraviolet (DUV) systems, which are used to manufacture older chips, and the world's only manufacturer of extreme ultraviolet (EUV) systems, which are used to produce the world's smallest, densest, and most power-efficient chips. ASML doesn't face any competitors in the EUV market for two reasons: It took decades to develop its cutting-edge technology, and its massive systems cost about $200 million each and require multiple planes to ship.
The world's three most advanced chip foundries -- TSMC, Samsung, and Intel -- all use ASML's EUV systems to manufacture their smallest chips. All three companies are scrambling to buy more EUV systems to produce more advanced chips. So as long as the semiconductor market keeps expanding, ASML's sales should keep rising.
How rapidly has ASML been growing?
ASML's growth follows the cyclical semiconductor market. As the following table illustrates, its growth cooled off in 2019 as the smartphone market stalled out and triggered a supply glut in memory chips. Its growth decelerated again in 2022 as the PC market suffered a severe post-pandemic slowdown.
|
Metric |
2018 |
2019 |
2020 |
2021 |
2022 |
|---|---|---|---|---|---|
|
Revenue growth |
22% |
8% |
18% |
33% |
14% |
|
Gross margin |
46% |
44.7% |
48.6% |
52.7% |
50.5% |
|
EPS growth |
27% |
1% |
38% |
69% |
(2%) |
Data source: ASML.
Yet ASML's gross margin continued to expand through those cyclical downturns because it had absolute pricing power in the DUV and EUV markets. If we smooth out that cyclical lumpiness, ASML's revenue still grew at a compound annual growth rate (CAGR) of 18% from 2018 to 2022 as its earnings per share (EPS) -- which was buoyed by consistent buybacks -- rose at a CAGR of 23%.
Last November, ASML claimed it could generate between 44 billion euros ($47.8 billion) and 60 billion euros ($65.2 billion) in revenue in 2030. The midpoint of that forecast (52 billion euros) suggests its revenue will grow at a stable CAGR of 12% from 2022 to 2030. It also expects its gross margin to expand to 56%-60% by the final year.
How can ASML become a trillion-dollar stock?
Assuming ASML's valuations hold steady, it would need to roughly quadruple its revenue to become a $1 trillion company. It generated 21.2 billion euros ($23 billion) in sales in 2022, and it would need to keep growing at a CAGR of 15% over the following 10 years to reach 84.8 billion euros ($92.2 billion) in sales by 2032.
That's higher than the midpoint of ASML's outlook from 2022 to 2030, but it has sandbagged its own guidance before. Back in 2016, ASML predicted it would generate 10 billion euros ($10.9 billion) in revenue by 2020, but it easily beat that target by 4 billion euros. In 2021, it predicted it would generate 24 billion euros ($26.1 billion) to 30 billion euros ($32.6 billion) in revenue in 2025 -- but analysts already expect it to hit the midpoint of that forecast this year with 27.1 billion euros ($29.5 billion) in sales.
Therefore, investors shouldn't be surprised at all if ASML quadruples its annual sales before the end of the decade. It might face some tough cyclical headwinds and regulatory issues along the way (especially regarding its sales to China), but I believe it's only a matter of time before ASML becomes a trillion-dollar tech stock.
