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ASML ASML stock is down 35% after hitting all-time highs in July. The leader in photolithography systems used in the manufacturing of semiconductors provided weaker-than-expected guidance for 2025, which has depressed its shares. But we think there’s opportunity here. The stock of this wide-moat company trades 23% below our fair value estimate and looks cheap today. ASML appears on Morningstar’s list of the Best Tech Stocks to Buy and is also among Morningstar chief US market strategist Dave Sekera’s 3 Cheap Stocks to Buy with Multiple Moat Sources.
We believe ASML will remain the top lithography equipment provider in semiconductor foundries for at least the next two decades. The fabs of TSMC, Intel, and Samsung were redesigned a decade ago to make them suitable for extreme ultraviolet lithography, a costly and long endeavor, so it is quite unlikely that ASML will be displaced from its position in the foundry. In addition, no competitor has yet matched ASML’s technological leadership. This competitive advantage is likely to keep expanding as the company increases its already-high research and development budget. Despite the high price of ASML’s machines, the company provides value to customers by bringing down the cost per wafer through increased productivity. ASML’s machines can last more than 30 years; the company sells them at an attractive gross margin but then generates recurring service revenue for decades.
Key Morningstar Metrics for ASML
Economic Moat Rating
We assign ASML a wide economic moat rating supported by cost advantages, intangible assets, and switching costs. ASML is the world’s largest supplier of photolithography machines for semiconductors with around 90% market share. It enjoys a wide technology gap versus competitors Nikon and Canon, with large investments in research and development that should continue widening ASML’s moat and act as a barrier to entry. Intangibles come from decades of internal know-how and long-term collaboration with companies like Carl Zeiss and scientific research institutes. Switching costs come from software and servicing machines; fabrication plants cannot afford unplanned downtime since this can cost millions of dollars.
Read more about ASML’s moat rating.
Fair Value Estimate for ASML Stock
Our fair value estimate is $935 per ADR. For sales, we expect 14% growth in 2025 to EUR 32 billion and 13% growth in 2026, as some new orders are pushed into that year. Our 2030 sales forecast is EUR 54 billion. For the next decade, we model a 10% compound annual growth rate for revenue, with EBIT margin expanding from 31% in 2023 to 45% in our terminal year. Gross margin and EBIT margin expansion will come from the leverage of R&D and operating expenses, more expensive extreme ultraviolet machines at better gross margins, and an improvement in EUV service margins, where ASML is focusing its efforts. We model slightly higher R&D and selling, general, and administrative expense intensity compared with management’s long-term guidance.
Read more about ASML’s fair value estimate.
Risk and Uncertainty
ASML’s machines represent a large percentage of a semiconductor foundry’s capital expenditure. ASML needs to provide unique productivity and service value, or its customers will try to reduce their dependence on lithography. Trade tensions between US and China are a headwind. Because ASML machines contain US parts, the US has effective powers to limit ASML exports to China or any other country. Supply chain management is also critical. The cyclical nature of the semiconductor industry adds to ASML’s uncertainty. Customer concentration is high, with TSMC, Samsung, and Intel representing a large amount of revenue.
Read more about ASML’s risk and uncertainty.
ASML Bulls Say
ASML’s machines last more than 30 years, providing recurring service revenue. The switching costs and intangible assets required to displace these machines are enormous, with no competitor coming close to ASML’s technological leadership.As lithography machines grow more complex, switching costs and service revenue potential strengthen. ASML has potential to improve gross margins in the next decade.We expect ASML to outpace the growth of the overall semiconductor market, thanks to its strong competitive position. We expect low-double-digit annual revenue growth in the next decade.
ASML Bears Say
ASML sells a low-volume, high-priced product. Lithography machines represent a high proportion of customer costs, so if the company fails to innovate, customers will look for alternatives.If controls on exports to China worsen, ASML’s growth trajectory will suffer. The company has no effective control over this risk as it largely depends on US government decisions.The cyclical nature of the semiconductor industry adds to ASML’s risk profile. Also, ASML depends on a limited number of suppliers for certain components, so any disruption will create bottlenecks and delays.
This article was compiled by Susan Dziubinski and Sylvia Hauser. Data as of Dec. 4, 2024.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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