ASML analysis: a critical semiconductor industry supplier with a monopoly position that pays a dividend

In Europe, you will probably find only a limited number of companies that have managed to occupy a similarly strong competitive position in the global economy as ASML. So what is ASML's competitive advantage?

ASML Holding N.V.

ASML $ASML+0.6% is a leading supplier to the semiconductor industry. The company provides chipmakers with hardware, software and services for the mass production of integrated circuit (microchip) designs. Together with its partners, it is driving the development of more affordable, powerful and energy-efficient microchips.

AMSL has a monopoly on EUV production

ASML is firmly associated with the development of extreme ultraviolet lithography technologies called EUV, but of course not only with them. However, it is true that it is EUV that can make the management of this company very happy. Using a wavelength of just 13.5 nm (almost X-ray range), EUV technology can do big things on a small scale. Using a 13.5 nm wavelength, EUV systems create the finest lines on microchips. They are used in high-volume manufacturing to create the highly complex base layers of the most advanced microchips (7 nm, 5 nm and 3 nm nodes).

If you have a relatively new smartphone, one of the latest gaming consoles or a smartwatch, chances are you've directly benefited from EUV lithography technology. High-end microchips contain billions of transistors. With each new generation, chipmakers are adding more and more smaller transistors to make chips more powerful, faster, and more energy efficient.

The company's portfolio also includes 3 other key offerings: deep ultraviolet lithography (DUV) systems, refurbished systems, and metrology and inspection systems.

Founded in 1984, ASML has expanded rapidly and is now one of the world's three largest semiconductor equipment companies, serving customers such as Samsung and Taiwan Semiconductor. Geographically, ASML operates globally, with 32,000 employees spread across 60 offices in more than 15 countries. Approximately 70% of ASML's revenue comes from chip manufacturers in Asia.

Itcan be assumed that a company interested in producing advanced chips using EUV technology will take advantage of the products offered by ASML. The latter can expect demand for the relevant production equipment to grow over time, with good sales already at this time, and of course there are also production machines for DUV (Deep UltraViolet) lithography.

Number of ASML systems sold worldwide between 2015 and 2021

ASML is traded on Euronext Amsterdam and NASDAQ under the symbol ASML.

The company's latest results

A few weeks ago, ASML announced its Q2 results. Many technology investors were expecting these results because, as a leader in lithography devices, the company has a pretty good overview of what's going on in the field.

ASML slightly beat analysts' estimates on both the top and bottom line, and revenue slightly beat management's guidance. Revenues came in at €5.43 billion (+35% y/y) and earnings per share at €3.54 (+40% y/y). The company's cash also declined to USD 4.27bn in 2Q22, mostly due to a USD 9.21bn share buyback program and USD 2.35bn in dividend payments over the past twelve months. The company is thus returning real value to its existing shareholders.

Over the next four years, ASML is expected to show excellent growth in revenue and net profit at a CAGR of 12.875% and 21.705% respectively. While these numbers represent a -5.2% decline from previous estimates in May 2022, it is clear that consensus estimates remain optimistic about ASML's future growth given the steady improvement in net profit margins to 33.3% by 2025 compared to 21.9% in 2019 and 31.6% in 2021.

Expensive valuation

Looking at ASML's financial results, I dare say there is no doubt that ASML is a great company. However, investors should note that ASML shares are trading at a relatively expensive valuation. Over the past 5 years, ASML stock has risen approximately 193%. In addition, ASML stock is now priced at a forward 2023 P/E of approximately 35x, which is nearly a 100% premium to the sector median as estimated by Seeking Alpha. In addition, the P/B is valued at approximately x22, a premium of 453%.

A word in conclusion

I like ASML stock because I believe it is one of the few truly outstanding European businesses with strong competitiveness, attractive business growth and high profit margins. However, at a 100% premium to the sector, I am also of the opinion that ASML shares are priced too expensively for an investor to enjoy an attractive risk/reward ratio - especially as the semiconductor industry has now entered a downward cycle that is likely to be here for some time.

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