ASML Stock: Fueling Intel's Dream As A Leading Foundry (NASDAQ:ASML) (2024)

Investment Thesis

ASML Holding N.V. (NASDAQ:ASML) is helping Intel (INTC) achieve its global foundry dreams by 2025.

In March 2021, INTC announced its ambitions, directly challenging TSMC's (TSM) and Samsung's (OTC:SSNLF) (OTC:SSNNF) market dominance. With ASML's TWINSCAN EXE:5200 system, the next-generation extreme ultraviolet (EUV) lithography machine, INTC may just match Samsung moving forward, as the latter aimed to market a 2 nm transistor by 2025.

As the sole producer of EUV (extreme ultraviolet) systems, ASML is also the vital cornerstone for the next semiconductor chip innovation moving forward.

Intel's Dream Becomes A Reality With ASML

Since announcing its foundry ambitions, INTC has been investing aggressively through a $20B investment into two new foundry production lines in Arizona. The new numerical aperture technology in the EXE:5200 system offered by ASML, boasts a high production system of 200 wafers per hour productive, which may quickly boost INTC's future innovations in chip production moving forward. In addition, to enable higher-resolution patterning for even smaller transistor features, the EXE:5200 ( including EXE:5000 ) systems feature 0.55 numerical aperture, an advancement over previous EUV machines with a 0.33 numerical aperture. With the improvement, higher-resolution patterning will be possible, which will result in even more compact transistor features.

As a key partner, ASML will be able to support INTC's return to the foundry industry with its High-NA technology from 2025 onwards. The technology is also touted as more advanced than the equipment currently used by TSM for its 3-nanometer chip processing node, though we expect TSM to quickly play catch up moving forward. Considering Gordon Moore's Law and ASML's new technology, we can expect the technologies' speed and capability to improve every two years while also halving the cost. INTC's early support of ASML's technology suggests that the former will become a serious contender in the semiconductor chips market, while ASML benefits from its long-term research and development. ASML President, Martin van den Brink, said:

Intel’s vision and early commitment to ASML’s High-NA EUV technology is proof of its relentless pursuit of Moore’s Law. Compared to the current EUV systems, our innovative extended EUV roadmap delivers continued lithographic improvements at reduced complexity, cost, cycle time and energy that the chip industry needs to drive affordable scaling well into the next decade. - Source: ASML

The next generation of high-NA EUV technology from ASML can also be seen as the next inflection point for INTC, just as how the EUV has been to TSM. Through AAPL's demand for the EUV technology in 2018, TSM had been converted from a non-EUV believer to its biggest customer. The early adoption had helped TSM to be the powerhouse it is today, while boosting TSM's revenues from $33.69B in FY2018 to $57.23B in FY2021, at a CAGR of 19.32%. As a result of the collaboration, TSM has been the sole manufacturer for AAPL's A13 chips since 2019 and M1 chips in 2020, with M2 chips set to be launched in 2022.

As of 2022, TSM is the global foundry with a market share of 54% in the semiconductor market, with Samsung nabbing second place at 17%. However, given the severe crunch affecting supply chain issues experienced in 2021, many tech companies, such as Tesla (TSLA) and Apple (AAPL), have decided to develop their own chips in-house moving forward. Therefore, INTC's decision to join the party seems logical, given how the global foundry market is expected to grow from $107.2B in 2021 to $151.2B in 2025, at a CAGR of 8.98%.

With semiconductors being the brains of modern electronics, ASML's relevance will only grow over time, given that the global semiconductor market is projected to grow from $452B in 2021 to $803.B in 2028 at a CAGR of 8.6%. In addition, with TSM and Samsung spending billions constructing new manufacturing plants worldwide, we expect much of that cash to also flow to ASML, given its current monopoly in the EUV market. Tech investor, Ian Hogarth, said:

As people look for alpha when investing in this trend of semiconductors being more and more critical to global supply chains, this [ASML] feels like it’s an obvious candidate. - Source: CNBC

Thus, ASML's massive upside potential is almost assured in the coming years, given the insatiable demand for semiconductors worldwide, as fast as ASML can produce the systems.

ASML Reported Record-Breaking Revenues And Improved Margins For FY2021

In the past five years, ASML has grown its revenue at a remarkable CAGR of 23.96%. In FY2021, the company reported revenues of $21.18B, representing an impressive increase of 33% YoY and 57.4% from FY2019 levels ( based on sales in €). In addition, ASML had revenues of $5.67B and EPS of $4.46 in FQ4'21, representing notable YoY increases of 17.1% and 14%, respectively ( based on sales in €). The company has also improved its gross margins from 48.1% in FQ4'19 to 52.7% in FQ4'21, partly due to higher software productivity upgrades.

For FY2021, ASML's growth in sales was highly attributed to the robust demand in its EUV system at a 41% YoY increase, with non EUV system contributing a 26% YoY increase. In addition, the company reported €26.2B of bookings for its EUV and DUV technology in the same fiscal year, representing tremendous YoY growth of 231%.

In addition, ASML has been reporting strong Free Cash Flow in FY2021 at $11.47B, representing a growth of 251% YoY and 407% from FY2019. These were partly attributed to customers' down payments on the company's massive orders in FY2021. As a result, its FCF margins also improved tremendously from 11.3% in FY2019 to 37% in FY2021.

ASML has also been increasing its R&D expenses by 13.6% YoY to €2.5B in FY2021, with guidance to spend €760M for FQ1'22, an increase of 22.5% YoY. As a result of aggressive R&D efforts, we expect the company to continue its innovation in its product portfolio, beyond its next generational TWINSCAN EXE:5200 High-NA system in 2025.

Given its fast shipments strategy, we also expect ASML to quickly ramp up its production capacity moving forward, despite the impact of the fire in its Berlin factory. The shipments will allow the company to skip certain testing work within the factory, upon the acceptance of final testing at the customers' venue. As a result, we expect ASML to be able to fulfill most of its bookings promptly moving forward.

ASML is expected to report revenues growth at a CAGR of 11.89%, over the next three years. Despite the slight deceleration, it is apparent that consensus estimates the company will report excellent EPS growth moving forward, due to the share buyback program, exceptional revenue growth, and potential improvement in forward gross margins. For FY2022, Morgan Stanley analysts projected a high estimate of $36.08M, due to the EU's rapid growth in 5G networks, representing an impressive 70.3% YoY increase. However, ASML guided a more moderate sales in FY2022 at 25% growth YoY.

As a way to give back to its investors, ASML announced multiple share repurchase programs in the past decade. Consequently, its shares outstanding have decreased by 10.9% since FY2012, despite the company's share-based compensation to its employees. In FY2021, ASML also acquired 14.4M shares for a sum of €8.6B. The strategic move has definitely improved the company's EPS growth and lowered its P/E ratio, further boosting its stellar performance thus far. Given its upward growth trajectory in the semiconductor industry, we expect the company's stock performance to improve over time.

So, Is ASML Stock A Buy, Sell, or Hold?

ASML is currently trading at an EV/NTM Revenue of 10.87x, slightly lower than its 3Y mean of 9.74x. It is also trading at $671.10 ( as of 21 March 2022 ), nearer to its 52-week low of $541.31, a 24% discount from its highs of $895.93 in September 2021. As a result, the stock looks attractive at current valuation, given its monopoly in the EUV lithography industry and its critical role in the global semiconductor market. Its undervaluation and massive upside potential provide interested investors with an excellent entry point.

Therefore, we rate ASML stock as a Buy.

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