ASML soars on surging demand

On Wednesday, Offshore portfolio holding ASML rose +6% after reporting blowout earnings on the back of soaring semiconductor demand.

The semicap supplier topped revenue and earnings estimates by +8% and +25% respectively as heightened customer demand for productivity improvements pulled forward meaningful software upgrade revenues into the quarter.

As a reminder, ASML is a mission-critical developer of leading-edge semiconductor equipment - in particular, the advanced lithography systems that enable chip manufacturers like Intel to "print" circuit designs onto silicon.

In our opinion, ASML is arguably the single most important technology business in the world, having a monopoly on the critical next-gen technology that enables global computing power to get orders of magnitude better and cheaper every couple of years (in other words, Moore's Law).

Demand for ASML's system solutions surged in Q1 as the world grapples with a global chip shortage that prompted ASML to dramatically hike its fiscal year outlook, with logic and memory revenue growth targets increased to +30% and +50% respectively (up from +10% and +20% just three months ago).

What's most impressive is that ASML's dominance in lithography is not driven by network effects, economies of scale, or your other more typical competitive advantages, but rather just a raw technological edge that has been slowly accumulated over decades of hard, bleeding-edge research & development.

The next-gen solutions ASML has pioneered (mainly, extreme ultraviolet or "EUV" lithography) took decades and tens of billions of dollars to develop as the fundamental problems they seek to solve require feats that push the limits of physics itself - achievements that can be thought of as akin to developing a flashlight that can accurately strike a penny on the moon.

To enable these types of outcomes to be achieved, ASML developed incredibly advanced and complex systems that can weigh up to 200 tons per unit and that each individually require a custom supply chain of up to 20 trucks and 3 cargo jets just to transport.

This is a technological and process advantage that's not going away any time soon, and one that we expect ASML will meaningfully benefit from over the next several years as it occupies the position as the de facto "arms dealer" sitting at the crossroads of two major and accelerating drivers of semiconductor capex (the competitive race between Intel/Samsung and TSMC for foundry parity, and the geopolitical race between US and China for technological/semiconductor independence).

Stepping back, we were pleased to see ASML's strength in Q1 and are optimistic on its ability to achieve its materially boosted outlook for the remainder of 2021, but remain ever-focused on the long-term.

As the world's need for leading edge computing power accelerates on the back of artificial intelligence, 5G, and autonomous driving-fueled demand, ASML should see accelerating secular growth in demand for its next-gen, mission critical lithography technology.

At the same time, its economic profile should meaningfully improve as nascent but growing subscription-like service revenues increasingly dominate its overall financial profile, boosting both margins and cash flow stability.

We believe the convergence of these two trends will have an extremely powerful effect and should drive ASML to outperform for years to come as it continues to act as the quiet but critical enabler behind the world's most important technological and economic advancements.