4 green flags for the future of ASML

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ASML Company (ASML 2.14%) is one of the largest manufacturers of semiconductor equipment in the world. The Dutch company is the world’s largest producer of photolithography systems, which are used to etch circuit patterns onto silicon wafers. It is also the only manufacturer of the leading extreme ultraviolet (EUV) systems needed to produce the world’s smallest, densest and most energy-efficient chips.

ASML’s monopolization of this crucial technology – which is used by the largest foundries like Semiconductor manufacturing in Taiwan (TSM 2.56%), Samsungand Intel (INTC 1.22%) — makes it a linchpin and indicator of the semiconductor industry. But that reputation is a double-edged sword: Ongoing concerns about decelerating sales in the PC, smartphone and cloud markets have all driven ASML shares down more than 30% from their all-time high. of $870.85 per share last September.

Image source: Getty Images.

But the stock has recently rallied after allaying some of those fears in its last Investor Day presentation on Nov. 11. Let’s review four green flags the company just raised regarding its long-term outlook, and why they suggest its stock could rise much higher by the end of the decade.

1. ASML offered a big boost for 2025 and beyond

At ASML’s previous Investor Day last September, the company said it would generate 24-30 billion euros ($24.9-31 billion) in revenue in 2025, with a gross margin of 54. % to 56%. He based these estimates on his “low” and “high” scenarios for wafer demand in the semiconductor industry.

But this time, ASML raised its 2025 guidance to 30 to 40 billion euros in turnover and maintained its gross margin guidance at 54% to 56%. He also predicted that its annual turnover would reach 44 to 60 billion euros by 2030 with a gross margin of 56% to 60%.

The midpoint of this forecast implies that ASML’s annual revenue could reach a compound annual growth rate (CAGR) of 12% from 2021 to 2030. Its gross margin would also increase significantly to 52.7% in 2021 – which does not That’s not so surprising, as it has unparalleled pricing power in the EUV market.

2. ASML ignores concerns about China

ASML generated 15% of its system sales in China last year, but it only sells its low-end deep ultraviolet (DUV) systems there. The Dutch government previously banned ASML from selling its EUV systems to China amid growing concerns about Chinese chipmakers producing more advanced chips.

The Biden administration recently banned all US companies from exporting advanced semiconductors, semiconductor equipment, and semiconductor services to China. But last month, ASML CEO Peter Wennink said all those bans would only have a “limited” impact on its system shipments in 2023 because it only sold DUV systems in China.

Wennink reiterated that stance during ASML’s Investor Day presentation, saying that even if Chinese chipmakers can’t increase capacity from their current levels, these restrictions could cause a “temporary hiccup” but would not change its outlook for 2030 that much. He said that even if new manufacturing facilities are not built in China, they would have to be built elsewhere to meet the growing market demand for new chips.

3. An expansion of its annual capacity

In 2021, ASML sold 42 EUV systems, which cost between $150 million and $200 million each and require multiple aircraft to ship. It continues to deliver and install these systems as quickly as it can produce them, and it even implements fast deliveries – which skip part of the testing process and defer billings for some customers – to get them out more rapidly.

As a result, market demand for ASML’s EUV systems still exceeds its supply, even as the semiconductor market cools. Indeed, TSMC, Samsung, and Intel still need to continually invest in smaller, denser chips to avoid falling behind the tech curve.

This is why ASML plans to increase its annual capacity to 90 EUV and 600 DUV (from 267 units in 2021) by 2025-2026. It also plans to launch its shipments of next-generation “high-NA” EUV systems, which will allow its customers to produce even smaller chips, in 2023 – and increase its annual production capacity to 20 systems by 2027-2028. .

4. ASML has a new stock buyback plan

On top of all these bullish forecasts, ASML has announced a new share buyback plan of up to 12 billion euros ($12.4 billion), which will last until the end of 2025. This represents approximately 5% of ASML’s current market capitalization and would continue its steady redemptions over the past decade:

ASML's capital has returned over the past decade.

Image source: ASML.

ASML shares aren’t cheap at 32 times next year’s earnings. But I think its monopolization of crucial chipmaking technology justifies that premium, and its recent investor day suggests it still has plenty of upside as it ramps up capacity and launches new systems. As a result, ASML remains an easy-to-buy-and-hold stock for long-term investors.

Leo Sun holds positions in ASML Holding. The Motley Fool holds positions and recommends ASML Holding, Intel and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: $57.50 long calls January 2023 on Intel, long calls $45 January 2025 on Intel, and short $45 calls January 2025 on Intel. The Motley Fool has a disclosure policy.

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