Can ASML become Europe’s first $1T company?
ASML Investment Case!
We are currently experiencing a massive semiconductor boom due to the convergence of multiple technological trends.
Battery costs have fallen to a level that makes electric vehicles, smartphones, laptops, and other devices more affordable than ever before!
Internet has never been faster and more widely available, driving growing demand for connected technologies!
Semiconductor designers, such as Nvidia, are creating extremely powerful chips, enabling new use cases!
Specialized $25B+ semiconductor fabrication facilities built by TSMC are manufacturing millions of semiconductor chips like clockwork!
All while the AI revolution is fueling unprecedented demand for powerful data center servers!
There is one company without whom none of this would have been possible, and that is ASML!
ASML is the Dutch company that makes the machine that makes the world’s most advanced semiconductor chips. ASML has a complete monopoly on this technology, enabling it to exercise extreme pricing power.
Furthermore, ASML is the most important company in Europe, the one bright spot in the continent that has completely missed the technological revolution.
While ASML has experienced incredible growth in the last decade, in the last year, questions have arisen whether this growth can be sustained in this geopolitically volatile world we are living in. These questions have sent the stock price down 34% from its all-time high.
Can ASML recover from this slump and return to accelerated growth?
Can ASML even become Europe’s first $1T company?
In this report, I will figure it out.
1. Business Model
2. The AI Opportunity
3. The Overall Opportunity
4. Valuation
5. Conclusion
1. Business Model
ASML stands for Advanced Semiconductor Materials Lithography.
Their core business is the design, manufacture, and servicing of lithography systems used in semiconductor production. This is an extremely complex process, so I will try to explain it as simplyT as possible.
A semiconductor computer chip is like the brain of electronic devices. It contains billions of tiny switches called transistors. These switches turn on and off to process information, enabling computer chips to do calculations, store data, and run programs.
The first semiconductor chips that were manufactured in the 1950s and 60s had only a handful of transistors on a single chip, and were extremely expensive and difficult to manufacture.
For instance, the Texas Instruments Series 51 logic integrated circuit released in 1961 had around 6 transistors per chip. It took several weeks to manufacture, and only around 10% of the chips actually worked. Moreover, it was also extremely expensive, costing $450 a piece, which is almost $5,000 adjusted for inflation.
Over the decades, there were a lot of major technological advancements that improved yields, reduced costs, and increased the number of transistors per chip to the millions.
However, it was ASML and their lithography systems that were crucial in pushing transistor counts into the billions, making semiconductor chips as advanced and cheap as they are today!
Lithography systems use ultraviolet light generated by extremely powerful lasers that is cast through mirrors and glass lenses to “print” tiny, microscopic transistors on silicon chips. I skipped many steps and only explained the basic principles behind this technology, as this is not a physics and science Substack.
Simply put, ASML makes extremely complicated, large, and sophisticated technology machinery, using thousands of suppliers, integrating hundreds of thousands of parts. The company has limited competition on the low end and no competition in the high end, and even if a new well-funded competitor were to emerge today, it would take decades and tens of billions of dollars to produce anything remotely similar, and that assumes ASML would stand still.
Without ASML machines, Nvidia couldn’t design the most advanced AI GPUs that power OpenAI ChatGPT, Apple couldn’t design its in-house iPhone and MacBook chips, AWS and Google Cloud couldn’t provide cloud services that power the entire internet, and TSMC couldn’t build $25B fabrication plants to manufacture these chips.
This makes ASML, possibly, the most important company in the history of humanity!
Let’s examine how the company makes money in more detail.