Wednesday, Jul 28th 2021

Monopolistic ASML continues to exceed high expectations


ASML Holding NV (ASML), a Titan Offshore strategy holding, reported its Q2 2021 earnings pre-market on Wednesday, July 21st. The company continues to exceed high expectations resulting from cyclical and secular tailwinds for the semiconductor industry, as the industry remains dependent on ASML’s equipment to produce chips at advanced process nodes. (You can think of process nodes as a foundry where new technology creates chips with smaller features, providing more advanced capabilities for processing speeds, power usage, and size.)

While ASML slightly missed expectations for reported revenue and EPS (due to a specific accounting policy), the stock has appreciated ~9% due to (1) massive beats and increases in bookings, (2) increased guidance, and (3) subsequent increases in consensus estimates. Here are some of the components we’re thinking about when it comes to ASML.

Continued Robust Demand

Many people focus on ASML’s EUV machine shipments, the most advanced technology available, which is required to create chips beyond ~7nm. The company’s total order book has ballooned to €17.5B, of which EUV machines account for €10.9B (62%). 80% of an expected 55 EUV shipments in 2022 is already booked, and 2023 capacity is expected to be over 60 units.

The takeaway here is that demand for the company’s equipment outpaces its supply. The order intake of €8.3B, including €4.9B for EUV, is staggering: a record for ASML. Demand is strong across all technologies and end markets, both leading and lagging edge chips.

And while advanced process nodes are more exciting to discuss, ASML’s commentary confirms Titan’s research that mature nodes will continue driving demand for DUV machines, especially given the current chip shortage.

The secular trends driving demand for ASML’s equipment are:

  • IoT (intelligent edge), which drives the demand for mature nodes, a secular trend in early innings.

  • AI and HPC (high-performance computing), which drives EUV shipments, the machines required to produce chips at advanced nodes (i.e. lower nm chips).

Capital Allocation

ASML already bought back €5.2B of the €6B (11.7mm shares) in a buyback program that was expected to last through 2022. The company has replaced that program with another, which will be executed by 12/31/2023 with €9B of capacity. Titan views this method of returning shareholder capital favorably, as the company is generating so much free cash flow that it cannot invest it all.

Growth Outlook

The current $500B semiconductor industry is expected to be worth $1T by 2030. This growth is driven by HPC, AI, and edge intelligence infrastructure, as mentioned above. We expect ASML to continue capturing substantial value from the long runway of growth for the industry as a whole.

ASML’s customers are seeing robust demand continuing through 2022, and cyclical catch-up driven demand will continue into 2022.

Stepping Back

We continue to have high conviction in ASML as the monopolistic compounder, supported by the secular tailwinds driving the semiconductor industry forward. The company continues to outperform high expectations and warrants the premium it trades at in the market given its monopoly position and ability to execute. We believe technological progress and the advancement of society rely on ASML for at least the next decade.

Our view is that ASML has a truly sustainable moat for at least the next decade, as its technology cannot be replicated *even if a competitor had nearly unlimited monetary resources.*

However, taking a step back, we expect the stock’s performance to cool down a bit following rapid growth over the past couple of years. We view stock price appreciation as resulting from upward revisions in the estimates of a company’s future free cash flow.

Given the material increase in consensus estimates following the earnings release, coupled with the company running up against capacity limitations (i.e. EUV shipments can’t be raised further through 2024), and the premium it is trading at relative to other leading semicap names (i.e. AMAT and LRCX), our view is that the stock’s dramatic outperformance will subside over the short-term.

We say this to level-set expectations near term, as we remain highly confident in the company’s ability to compound value at high rates over the next 5-10 years.

Looking Ahead

Looking forward, we’d like to see how confident management is in the company’s prospects, given the extended robust buyback program.

Additionally, the analyst day coming up in September is a catalyst event that may drive the stock higher. Our checks indicate the company is expected to revise its 2025 revenue projection from €24B to €27B-€30B (+18.8% at the midpoint), given current estimates indicate the company is expected to hit its prior target in early 2024.

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