?? A MONOPOLY IN EUV LITHOGRAPHY - ASML ANALYSIS

$ASML, founded in 1984 in the Netherlands, is currently the largest supplier specialized in the development and manufacturing of lithography tools for the semiconductor industry and literally the only player in the EUV segment. 

Despite the global pandemic and resulting economic slowdown, the semiconductor industry remained resilient, finishing 2020 with industry revenue growing by 5.4% and the trend is likely to continue forward due to the mainstream adoption of IoT, 5G and the mass shift to EVs.

Here are some of the reasons why I’m bullish on ASML for the next years to come.

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1. ASML has 100% market share in EUV and 88% share in DUV Immersion.
2. The IDC forecasts the semiconductor market will grow 7.7% in 2021.
3. TSMC and Samsung, the two giant chipmakers, depend on ASML to produce 5nm-7nm chips. Intel is also doubling down on ASML EUV technology.
4. Already working in the next EUV generation - High-NA - to unlock the doors to 2nm-3nm chips (ASML claims that this tech is 70% better than the current EUV).
5. Extensive R&D team with more than 10.000 people (probably the biggest within the industry).
6. Dominates the e-beam patterned wafer inspection sector (metrology/inspection) with 74% market share.
7. The company uses machine learning and big data to predict both lithography and metrology processes with 100% accuracy. 

Also noteworthy that the company has high margins and has been profitable for many years, increasing their EPS significantly in the last years and with sufficient cash to liquidate the debt.

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1. The company has high multiples and is expensive compared to its peers.
2. The expectations of growth and innovation are very high and the share price reflects that.
3. Geopolitical tensions and trading restrictions are rising particularly between China and the US which can lead to a decoupled ecosystem. 
4. High competition in the lithography equipment industry by Canon and Nikon in respect of DUV.
5. Highly skilled people with a technical background are scarce in the labor market.

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ASML is a high-quality business with a unique lead in a growing industry so those high multiples are a sign of ?????????????? rather than an overvalued business. The semiconductor will be growing at a fast pace with some mega trends pushing for it, the node size trend is to go smaller and it’s unlikely that new competition will come in the coming years. 

With analysts forecasting an EBITDA and EPS growth of 21.90% and 22.70%, respectively, for the FY2021, I’m very confident that the company is going to either reach or beat expectations.

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Thanks for reading.

Let me know what's your opinion in the comments down below.


All the best,

Paulo Sá