To The Moon

$ASML Holding NV(ASML)$ lithography system orders hit all time highs last quarter.

Yet, the stock is down 25% in the last twelve months.

Meanwhile TSMC announced 3 new plants in US and it’s expanding in Japan and EU.

They will have to order more systems.

Why the hell people keep selling $ASML Holding NV(ASML)$ ?

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Here is my full investment thesis: 🧵

1/ What does ASML do?

It's the sole manufacturer of Extreme-Ultraviolet Lithography Machines (EUVL) needed for manufacturing cutting edge chips.

In short these are the machines enabling foundries like TSMC to etch microscopic circuits on silicon.

Here is how they work:

2/ ASML has 100% market share in EUVL.

It started developing this technology back in 1990s. It took two decades.

An EUVL machine takes:

- Four months.

- 100,000 parts.

- 5,000 suppliers.

ASML owns some of the suppliers and patented parts.

It's impossible to copy them.

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3/ An average EUV system costs $200 million.

As they become more and more complicated their price skyrocketed.

An EUVL machine costs $200 million.

ASML predicts next-gen EUVL machines will sell over $280 million.

ASML has no alternative, thus it has amazing pricing power.

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4/ These machines stand the test of time.

95% of all lithography machines sold by ASML in the last 30 years are still working today.

Old machines are now used to manufacture less complex chips.

This allows ASML to generate significant maintenance revenue besides sales.

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5/ Result? Revenues are consistently growing.

It grew revenues 14% annually in the last 5 years while earnings grew nearly at 16% annually in the same period.

This is already astonishing but it's about to accelerate.

Here is why:

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6/ We simply don't have enough chips.

Amazon CEO Andy Jessy and Microsoft CEO Satya Nadella openly said they are supply constrained when it comes to AI.

Sam Altman also announced that they can't roll out ChatGPT 4.5 fast enough because they don't have enough GPUs..

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7/ $Taiwan Semiconductor Manufacturing(TSM)$ is rapidly expanding to meet the demand.

They have just signed a deal to invest $100 billion in the US and build 3 more fabs in Arizona.

It is also building new plants in Japan and Europe.

Other foundries like Intel and Samsung are expanding capacity to meet demand.

They all will have to put new orders for ASML's lithography machines.

8/ As new plants are finished, share of EUV systems in sales will increase.

ASML sold less EUV systems in 2024 than it did in 2023.

As foundries enhance their existing capacity and add new fabs, the share of EUV sales will increase.

Result? Revenue growth will accelerate.

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9/ It's also returning capital to investors.

The amount it spend on buybacks and dividends has consistently increased since 2015.

It bought back $500 million worth of shares last year.

Over time, aggressive share buybacks will result in higher EPS and higher stock price.

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10/ Valuation is amazingly attractive right now.

It sold a total of 418 units last year at an average price of $52 million per system.

Given that foundries are expanding and new systems are exponentially more expensive than old ones, we can assume it can easily sell 550 units in 2030 with an average price of $70 million.

This gives us $38 billion revenue from sales.

Historically, it generated maintenance revenue in the ballpark of 1/3 of the sales revenue.

If we add $13 billion maintenance revenue, we will get $51 billion total revenue in 2030. Management also expects between $44-$60 billion revenue for FY 2030.

Even if we keep the net margin steady at 28%, we will get $15 billion net income.

Given that it holds 100% monopoly, 30 will still be a conservative P/E that also carries monopoly premium.

This gives us $450 billion company. Even if we use 10% as a discount factor, we will get $279 billion.

It's valued exactly at $278 billion today.

An exceptional company at a fair value?

You should take that bet every time.

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