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With a stock market performance ten times better than that of the Nasdaq, ASML is ahead of most of these American competitors. The company from Veldhoven, in the south of the Netherlands, designs and builds machines which in turn are used to produce semiconductors, that is to say elements which have invaded almost all of our daily lives. Expressed in this way, one can think that this industry is intrinsically growing. In reality, it’s a little more complex because the supply is constantly increasing and the prosperous sectors are not immune to a certain cyclicality, nor to overcapacity. But for ASML, the equation is a bit different, simply because there aren’t really any alternatives to the group’s products. Let’s explain this in a bit more detail.
In the field of semiconductor manufacturing equipment, three countries take the lion’s share: the United States, Japan and the Netherlands. The biggest player in the world is the American Applied Materials. But the one that the stock market values the most by far is ASML. To give you an idea, its stock market weight, 244 billion euros at the time of writing, greatly exceeds those of L’Oréal or Shell (around 200 billion euros). For what ? Because ASML drains 90% of the DUV photolithography market, ie the etching of integrated circuits on silicon wafers. Better still, the company is several years ahead in the EUV engraving process, which allows even more advanced performance. “ASML’s technology is nothing less than a miracle for which competition is unthinkable for the next decade”, nicely summarizes AlphaValue analyst Sejal Varshney.
This situation explains the attraction exerted by ASML on investors. In ten years, the action has gained more than 1,000%. Turnover increased from 5.2 billion euros in 2013 to 21.2 billion euros in 2022, representing an average annual increase of 15%. At the same time, the operating margin increased from 20 to 30%. Liquidity generation is quite considerable, although boosted by shortages in the recent period. But let’s say that at cruising speed, the free cash flow margin is in the 20-25% range. Based on a turnover of 30 billion euros by 2024, the profit should thus stand at 7.5 billion euros. A quick calculation shows that the case pays more than 30 times these profits, which places ASML among the most richly valued European players, like Hermès, Dassault Systèmes or the already mentioned L’Oréal. It is the price of excellence.
Blue skies but some threats
With an overflowing order book and an unrivaled competitive advantage, what could stand in the way of ASML? The first risk that comes to mind is the pressure exerted by the United States on its allies to prevent Beijing from having access to advanced technologies. China already cannot access the most sophisticated production systems, but Washington is pushing to extend the restrictions to other machines. At this stage, ASML has not yet been penalized too much, but it is a point of vigilance. We can cite among the number of other threats the risk attached to the high technicality of the equipment produced, which forces the company to maintain a level of excellence at all times with very demanding customers. And of course the fact that being number 1 and in an oligo-monopolistic position, ASML can almost only go down if the competition manages to raise its voice.
However, it will be understood that the company has what the legendary investor Warren Buffett calls a “moat”, that is to say a colossal competitive advantage that is difficult to shake. The entry ticket is high on ASML, but it is a file with almost unique virtues, which probably has its place in any long-term European selection.