The Future of Artificial Intelligence Relies on a Single Company’s Dominance
Artificial intelligence (AI) has taken the world by storm, but few people realize that its development relies heavily on two critical components: sophisticated logic chips and high-bandwidth DRAM memory (HBM). However, these essential building blocks cannot be produced without extreme ultraviolet lithography (EUV) machines. And here’s the surprising part: the company with a monopoly on EUV technology, ASML Holdings, has seen its stock plummet by 40% from its July all-time highs and is down 10.5% on the year.
Understanding the Recent Pullback
Despite the significant decline, ASML’s stock isn’t exactly “cheap” by conventional means. Even at these “low” levels, the stock trades at 36 times trailing earnings. The recent pullback was due to weak orders in its recent quarter, as foundry and memory customers adopted a more cautious investment stance for 2025. However, spending on ASML machines will still grow overall.
A Shift in Valuation
ASML’s valuation has returned to its average over the past 10 years, but it’s also near the lows of the past five years. However, the past five years may be a better benchmark for ASML’s valuation, as the company has seen a structural improvement in results due to the adoption of EUV since that time.
Gross Margin Expansion
In 2019, ASML’s gross margins were in the mid-40% range, but as EUV adoption took off in earnest, ASML’s gross margins surged to the low-50% range by 2021, where they have generally stayed. This margin expansion coincided with the rise of EUV machines within ASML’s product mix.
EUV Sales Growth
EUV sales have grown at an even faster 34.8% annualized rate between 2019 and 2023. Management believes this growth can continue, and it seems likely as EUV continues to make up a larger portion of revenue and profits.
The Future of EUV
EUV has become necessary for semiconductors at 7nm and under, which were first produced in high-volumes starting in 2019. Not only should newer and improving EUV machines continue growing for years to come as more semiconductors are produced on more advanced nodes, but ASML also just began shipping its first “high-NA” EUV machines.
High-NA Machines
These machines cost as much as $380 million, or more than twice the price of older “low-NA” EUV machines in production today. High-NA is able to print light at resolutions of 8nm, compared with 13nm for low-NA machines. That means mastery of high-NA will enable chipmakers to print intricate designs with fewer passes through a manufacturing line, saving costs and decreasing the odds of defects.
2030 Projections
At its recent investor day, ASML guided for what it believes the company can achieve between now and 2030, with a low, medium, and high estimates for revenue and earnings. The company sees itself growing at a double-digit pace and, importantly, continuing to expand gross margins as EUV makes up more of the mix.
A Cheap Valuation
Today, ASML has a market cap of about 251 billion Euros, or about 17.8, 13.7, and 11.0 times the low, mid, and high-end scenarios for 2030 earnings. That’s a cheap valuation based on 2030 numbers.
Will ASML Maintain Its High P/E Ratio?
The big question is, will ASML be able to maintain a high P/E ratio at that time? That will depend on whether investors see continued strong growth prospects beyond 2030. After all, growth rates are harder to maintain as a company grows larger. However, investors also reward companies with strong competitive advantages and dependable profits with high multiples, even if they are relatively low-growth.
A Solid Buy Today
For that reason, ASML sure looks like a solid buy today after this big pullback. With its monopoly on crucial EUV technology, ASML is poised for continued growth and profit margin expansion. And with its 2030 projections looking promising, investors may be rewarded with a high multiple even in the future.
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