Not all monopolies are illegal. Some are born out of extreme innovation and unmatchable products. That’s the case with this company, whose stock I don’t see myself ever selling.
A vital enterprise
ASML (NASDAQ: ASML) stands for Advanced Semiconductor Materials Lithography. This Dutch company used to be part of Philips, from which it was spun out of in 1988.
It develops and manufactures lithography systems. These machines are used by semiconductor companies to design and make semiconductor chips. This involves the fine printing of electronic circuits on silicon wafers using light. So we’re talking about equipment that is absolutely critical to the production of microchips.
And without microchips, there would be no digital information age. Chips comprise the processing and memory units of any modern digital device, whether that’s smartphones, games consoles, or vehicles.
Crucially, ASML doesn’t compete with semiconductor manufacturers such as Taiwan Semiconductor Manufacturing, Samsung, and Intel. It sells its machines to all these chipmakers, meaning it grows alongside the overall global semiconductor market. And that industry is expected to double to over $1trn within the next decade.
A virtual monopoly
ASML has developed a light source with a wavelength of only 13.5 nanometres. This Extreme Ultra Violet (EUV) wavelength is more than 14 times shorter than Deep Ultra Violet (DUV) light, which is the current widespread technology.
At present, ASML controls more than 80% of the whole lithography market. But as the industry inevitably moves to next-generation EUV machines, the firm will have no competition. That’s because it‘s the only company in the world that makes this type of lithography system.
Amazing complexity
The company’s EUV machines take years to build and only so many can be shipped in any given year. A single machine contains around 100,000 components and 2km of cables. Costing $150m, it’s as big as a bus and requires 40 freight containers or three jumbo jets to be transported to a chip fabrication plant.
The flip side of this lengthy manufacturing process is that management has great visibility into its future earnings. And recently ASML was in a position to raise its 2025 guidance to €30bn to €40bn (from €24bn to €30bn), with gross margin guidance at 54% to 56%. It even forecast its annual revenue to reach between €44bn to €60bn by 2030.
Needless to say, the company has enviable pricing power. Intel, for example, this year placed an order with ASML for one of its new, advanced systems that will cost in excess of $340m.
Geopolitical risk
This year, the Biden administration banned all US companies from exporting advanced semiconductors and chip manufacturing equipment to China. ASML generated 15% of its sales in China last year, but it only sells its lower-end DUV machines there.
But this geopolitical risk isn’t going away, and might result in political pressure on the firm to also stop selling its DUV systems in China.
Still, the demand for its EUV systems is still outstripping its supply. In fact, ASML is now sitting on a overall backlog of orders worth €38bn.
I think ASML is the ultimate pick-and-shovel play on the digitisation of the entire world. So as things stand, I just can’t imagine myself ever selling the stock.
