Artificial intelligence (AI) requires the most sophisticated logic chips and a boatload of high-bandwidth DRAM memory (HBM). But neither of those two essential building blocks can be produced without extreme ultraviolet lithography (EUV) machines.
Thus, you may be surprised to learn that the company with a monopoly on EUV technology, ASML Holdings (ASML +4.06%), has actually seen a pretty big pullback in its stock. In fact, the stock is roughly 40% below its July all-time highs and down 10.5% on the year.
Why would that be? And is the current pullback an opportunity for long-term investors? To assess, let's dig in to the prospects for ASML and the 2030 projections it just gave at its November Investor Day.
NASDAQ: ASML
Key Data Points
A premium valuation even after a pullback
To be sure, although ASML is down nearly 40%, the stock isn't "cheap" by conventional means. Even at these "low" levels, the stock trades at 36 times trailing earnings. The recent pullback was due to weak orders in its recent quarter, as foundry and memory customers adopt a more cautious investment stance for 2025 -- even though spending on ASML machines will still grow overall.
After the big pullback following early year AI-fueled enthusiasm, ASML's valuation is back to its average over the past 10 years, but it's also near the lows of the past five years.
ASML PE Ratio data by YCharts
But the past five years may be a better benchmark for ASML's valuation, as the company has seen a structural improvement in results because of the adoption of EUV since that time. In 2019, ASML's gross margins were in the mid-40% range, which is where they had been for the prior decade. But as EUV adoption took off in earnest in 2019, ASML's gross margins surged to the low-50% range by 2021, which is where they have generally stayed.
That margin expansion coincided with the rise of EUV machines within ASML's product mix, which also includes less-advanced deep ultraviolet machines (DUV) and some metrology equipment too. In 2019, ASML shipped 26 EUV machines worth 2.79 billion Euros, making up 31% of its systems revenue. But by 2023, ASML shipped 53 EUV systems for $9.21 billion Euros, making up 42% of system sales.
So, ASML's margins are now structurally higher.
ASML's growth also justifies a high multiple, with its top line growing at a 16.9% annualized rate between 2014 and 2024's estimated figures, with earnings per share growing at a 22% average rate over that time. But EUV sales have grown at an even faster 34.8% annualized rate between 2019 and 2023.
Can that growth and profit margin expansion continue? Management believes it can, and it seems likely as EUV continues to make up a larger portion of revenue and profits.
Image source: Getty Images.
EUV's rosy future
EUV has become necessary for semiconductors at 7nm and under, which were first produced in high-volumes starting in 2019. Not only should newer and improving EUV machines continue growing for years to come as more semiconductors are produced on more advanced nodes, but ASML also just began shipping its first "high-NA" EUV machines. These machines cost as much as much as $380 million, or more than twice the price of older "low-NA" EUV machines in production today.
High-NA is able to print light at resolutions of 8nm, compared with 13nm for low-NA machines. That means mastery of high-NA will enable chipmakers to print intricate designs with fewer passes through a manufacturing line, saving costs and decreasing the odds of defects.
At its recent investor day, ASML noted that not only have foundry customers been buying their first high-NA machines for research and development, but high-NA is actually producing products at one customer already.
Given the advantages of high-NA, if one foundry or memory customer is already using it in production, one can be sure other competitors will likely race to implement high-NA soon. That could lead to further profit growth for ASML in the next few years.
And between 2030 and 2035, ASML plans on introducing "hyper-NA" machines, which promise to be even more powerful and capable of further transistor shrink. So, the growth runway for EUV seems long.
2030 target ranges
Management also guided for what it believes the company can achieve between now and 2030, with a low, medium, and high estimates for revenue and earnings. The company sees itself growing at a double-digit pace and, importantly, continuing to expand gross margins as EUV makes up more of the mix.
|
Metric for 2030 |
Low Estimate |
Medium Estimate |
High Estimate |
|---|---|---|---|
|
Revenue |
44 billion |
52 billion |
60 billion |
|
Implied annualized revenue growth from 2024 (28 billion euros) |
7.8% |
10.9% |
13.5% |
|
Gross margin |
56% |
58% |
60% |
|
R&D |
6 billion |
6.3 billion |
6.6 billion |
|
SG&A |
1.7 billion |
1.8 billion |
1.9 billion |
|
Operating income |
16.9 billion |
22.1 billion |
27.5 billion |
|
Net income |
14.1 billion |
18.3 billion |
22.8 billion |
Data source: ASML2024 investor day presentation. Figures not in percentages are in euros.
Today, ASML has a market cap of about 251 billion Euros, or about 17.8, 13.7, and 11.0 times the low, mid, and high-end scenarios for 2030 earnings.
That's a cheap valuation based on 2030 numbers. But remember, this is thinking six years out, and there is a time value associated with waiting that long. On the other hand, ASML will also be generating earnings and cash flows every year leading up to 2030, likely lowering its share count from repurchases. Thus, the price to earnings per share in 2030 will likely be a tad lower than these figures.
The big question is, will ASML be able to maintain a high P/E ratio at that time? That will depend on whether investors see continued strong growth prospects beyond 2030. After all, growth rates are harder to maintain as a company grows larger.
That being said, investors also reward companies with strong competitive advantages and dependable profits with high multiples, even if they are relatively low-growth. ASML certainly has that, as it's highly likely to maintain its monopoly on crucial EUV technology going forward. Furthermore, ASML's growth could also remain strong, especially if hyper-NA machines coming in the 2030s offer the same kinds of improvements over today's machines.
So, it's quite possible ASML could still garner a multiple in the 20s or 30s even in 2030. For that reason, ASML sure looks like solid buy today after this big pullback.
