ASML earnings: Focus on the long-term growth in semiconductors

Focus on the long-term secular growth in semiconductors

How nervous should investors be about ASML’s Q1 result today? ASML has had a history of many ups and downs as the annual revenue figures since 1997 show. But it is also clear that the cyclicality of ASML’s business has declined over the years and especially since 2013 the increasing adoption of semiconductors across many applications has stabilised the growth trajectory. The red bars highlights analysts’ expectations for revenue until 2028.

In 2023 revenue hit €27.6bn and this year will only see a small increase before growth picks up again in 2025 with revenue expected at €36.2bn. Our message to investors after today’s Q1 result is to focus on the long-term. Semiconductors are getting integrated in more and more physical applications as the world gets more connected and will need more local computing power. AI and the energy transition will become key technological objectives for many countries and the increased geopolitical fragmentation will mean more localized chip production. As a result a huge capital expenditures wave is under way.

ASML is not the only way to capture the growth of semiconductors. Please check our semiconductor theme basket for more inspiration.

ASML’s competitive edge

The success of ASML and the future returns for shareholders will rely on ASML's ability to sustain its competitive edge in the industry. Below we list ASML's five key competitive edges: 

1. Technological leadership: ASML invests heavily in R&D to continuously innovate and develop cutting-edge lithography systems. Their machines utilize advanced technologies such as Extreme Ultraviolet (EUV) lithography, which enables the production of smaller, more powerful chips, giving ASML a significant technological edge over its competitors.
   
   
2. High barrier to entry: The semiconductor industry requires substantial expertise, significant capital investment, and complex technological know-how. ASML's proprietary technologies, patents, and deep industry knowledge create a high barrier to entry for potential competitors, thereby strengthening its market position.
   
   
3. Customer relationships: ASML has strong relationships with major semiconductor manufacturers worldwide. These long-standing partnerships are built on trust, reliability, and the ability to deliver the highest quality equipment tailored to the specific needs of each customer. This strong customer base provides ASML with recurring revenue streams and a competitive advantage in securing new contracts.
   
   
4. Global reach: ASML operates on a global scale, with a presence in key semiconductor manufacturing regions such as the US, Europe, and Asia. This global footprint allows the company to effectively serve its diverse customer base and adapt to changes in regional demand and industry trends.
   
   
5. Vertical integration: ASML's vertical integration strategy, which includes the acquisition of companies like Cymer and Carl Zeiss SMT (24.9% minority stake), allows it to control critical components of the semiconductor manufacturing process. By owning key technologies and expertise across the lithography supply chain, ASML can optimize product performance, quality, and reliability, giving it a competitive advantage in the semiconductor industry.

Key risks to consider

While ASML possesses some strong competitive advantages it is important for investors to recognize the risk factors that can negatively impact the business of ASML. Some of these risk factors are:

• Cyclicality of the semiconductor industry (which the historical revenue chart above highlights).
  
  
• Dependence on a few large customers.
  
  
• Technological risks with especially Chinese equipment makers potentially being strong competitors in the future as has recently been seen in the car industry with Chinese EV makers.
  
  
• Supply chain disruptions are a key risk as reliable and cheap access to components is critical for ASML’s production.
  
  
• Regulatory and political risks as ASML is seen as a key bottleneck in the global AI chip production. The trade friction between the US and China has also extended into AI chip technology in which the US government has pushed the Dutch government to exercise some export controls on ASML machines for the Chinese market.

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