2023-03-14 10:00:00 ET
Summary
- ASML has had three significant events since my last coverage.
- The Investor Day delivered strong expectations for the future of the company.
- Applied Materials brought some tensions with its news of the Centura Sculpta device.
- ASML remains an attractive investment for the long term.
ASML Holdings (ASML) is one of the leading semi-cap companies, most well known for its monopoly in Extreme Ultraviolet ((EUV)) Lithography machines. The company is a vital position in my portfolio at over 6% and a lot has happened since I last wrote about the company four months ago. In this article, I'll go over the two main events that happened since my last coverage: The past Investor day and the recent announcement of the Applied Materials (AMAT) Centura Sculpta device.
ASML's Investor Day delivered
ASML held its Investor Day last November. The event discussed the tailwinds the semiconductor sector is experiencing and will experience over the last decade. ASML highlighted throughout the presentation that the whole sector is growing, not just the leading edge. Below you can see one of the slides, showing how the demand for wafers is expected to grow and how much has changed since the expectations in the 2021 Investor Day. All areas of semiconductor content are expected to grow, including mature chips from companies like Texas Instruments (TXN). I talked more in-depth about the opportunity in these mature nodes in a previous article on TI .
Another significant reason for new demand are the continued move towards sustainable solutions, which often need more chips. Electrification is a trend touching many industries and helping the semi-industry as a tailwind. Because of this development, it is essential not to ignore ASML's DUV business, which also has a significant growth runway, even though there is competition in this space from Nikon (NINOY) and Canon (CAJPY).
The third significant point I want to highlight is the drive for technological sovereignty by many developed regions like the US, Japan, Europe and China. ASML estimates that this onshoring of semiconductor manufacturing capacity will result in a global 10% inefficiency of the total wafer installed capacity by 2030. This of course is a tailwind for ASML, as companies build redundant capacity that needs new machines.
This culminates in the updated financial model ASML published, which showed a significant increase compared to the Investor Day 2021 expectations. ASML now expects to grow its revenues to up to 60 billion Euros by the end of the decade, driven by the aforementioned tailwinds.
Applied Materials creates tensions for ASML
At the end of February Applied Materials created a lot of fuzz after they announced its Centura Sculpta Patterning System. The machine is promising to replace the loops used in EUV Double patterning. I'll briefly explain the machine, but I recommend you check out the article my friend and fellow creator Best Anchor Stocks wrote about the Centura Sculpta and its workings.
Chip manufacturers increasingly use EUV double patterning to print smaller chips' features by splitting a high-density pattern in half and producing two masks. Below you can see an illustration by AMAT showing the significant reduction in the process flows the new machine can achieve. Instead of doing the whole EUV process twice, customers only need to do it once and use the pattern shaping process to do the second patterning. This of course was a reason for ASML investors to raise the alarm. This process could reduce the EUV intensity of leading-edge chips, therefore reducing the demand for ASML's EUV machines.
EUV machines are costly with current generation 0.33 numerical aperture ((NA)) EUV machines selling for more than $150 million each and the new 0.55 NA ( High-NA ) machines pre-ordered for more than $300 million . This significantly limits the number of companies that can afford these machines. Right now ASML only has the following five EUV customers (numbers in Billion Dollars):
Name | Revenue | Operating Cash Flow | Capital Expenditures |
TSMC (TSM) | $73.64 | $52.39 | $39.22 |
Samsung (SSNLF) | $240 | $49.38 | $39.25 |
Intel (INTC) | $63.05 | $15.43 | $25.05 |
Micron (MU) | $27.16 | $12.19 | $11.25 |
SK Hynix | $34.21 | $13.43 | $12.23 |
We can see that these companies are all behemoths generating >$10 billion in operating cash flows and spending an almost equal amount on Capital Expenditures. This showcases the capital intensity of the business model for advanced logic and memory chips. Not many companies can compete in this field, due to the capital intensity, as a result narrowing the possible clientele for ASML. With its new Centura Sculpta, AMAT claims the following benefits to customers:
- Capital cost savings of approximately $250 million per 100K wafer starts per month of production capacity
- Manufacturing cost savings of approximately $50 per wafer
- Energy savings of more than 15 kwh per wafer
- Direct greenhouse gas emissions reduction of more than 0.35 kg of CO 2 equivalent per wafer
- Water savings of approximately 15 liters per wafer
A Forbes article from last year stated that TSMC has capacity for 180k 28nm wafers a month and overall for well over a million. Although double patterning is not used in all of those wafers, it shows the potential for cost savings through the Centura Sculpta. The semiconductor equipment industry is highly integrated, with few key players that are collaborating to bring the industry forward. Due to the big investments needed (AMAT has been working on this device for many years) it often doesn't make sense to compete for applications. Roadmaps must be discussed with other industry players, so ASML must have been well aware of this development and anticipated it in their Investor Day projections. Reducing costs is a net positive for the industry and all its players, because it frees up more Capital, which these behemoths can use to accelerate their capacity expansion. This should not harm ASML, potentially even benefit them with additional orders. AMAT's device is not intended to compete with ASML, it is enhancing the process. The Centura Sculpta is not capable of doing the EUV steps, it can merely copy it and replace the second loop. Increased productivity is a win-win-win situation for all parties involved in high-volume manufacturing.
Q4 Summary
ASML also reported earnings since my last article. The company beat both the top and bottom lines and initiated strong guidance in line with its strong expectations from Investor Day. ASML expects to grow revenues by more than 25% in FY 2023 with slight gross margin improvements. ASML continued to grow its net bookings by another 6.3 billion Euros in the quarter. Bookings have grown by over 6 billion Euros for the past five quarters going as high as 8.9 billion in Q3 2022. This large backlog protects ASML well from the slowdown in the semi-cycle.
ASML is still attractive
I will use an inverse DCF model to value ASML. Using the trailing 12-month Free Cash Flow of 7.2 billion Euros, a 1% reduction in shares outstanding and a 10% discount rate we get a priced-in growth rate of 12% for the next five years and 10% for the following five years. The low end of ASML's guidance for revenue growth was a 10% CAGR with the upper end being a 14% CAGR. Also, we can expect further operating leverage with gross margins expected to rise to 56-60%.
From a technical level, the stock is still elevated above its 200-day moving average. While I do not put much weight into technicals, I like to look at the 200-day SMA to understand how the sentiment for the stock is and prefer to buy when the stock is trading under the 200-day SMA. ASML still looks attractive at these levels, especially considering the enormous order backlog of over 30 billion Euros. ASML is a significant position in my portfolio and will remain that way. If we see more weakness in the stock, I'd also be happy to buy more.
For further details see:
ASML: Fundamentals Are Improving And Centura Sculpta Fears Are Overblown