🖥ASML: Most Important Company in the World

TLDR;

• ASML’s Q4 FY24 results: €9.3B revenue (+28% YoY), €2.7B net income (+31.5% YoY).
• Monopoly on EUV machines with huge moat due to complexity.
• Risk of sanction and supply chain issues.
• Expected 61% net income growth and 255% FCF growth by 2026.
• Fair value: €894.41, potential upside: 23.75%, expected returns: 9.02%/year.
• Hold rating due to reasonable valuation but limited upside.

ASML Q4 FY24 Results:

1. Revenue: €9.3B (+28% YoY)
2. Net Income: €2.7B (+31.5% YoY)
3. Gross Margin: 51.7%
4. Net Margin: 29%
5. Free Cash Flow: €8.9B (+242% YoY)
6. Free Cash Flow Margin: 14.2%
7. Share Repurchases: $375M (3.4% of revenue)

How incredible $ASML technology is?

• $ASML is the sole global supplier of Extreme Ultraviolet (EUV) lithography machines.
• EUV machines are crucial for producing advanced semiconductor chips.

Extreme Precision of ASML

• ASML’s machines enable incredible precision, almost impossible to imagine.
• One machine costs $250 million and needs 40 containers, 20 trucks, and 3 jets to transport.

The Lithography Process

• The process involves shooting a laser at tiny tin droplets.
• The droplets are vaporized, creating plasma, which requires heat 40 times hotter than the sun’s surface.
• This process happens 50,000 times per second.

Mirrors for EUV Machines

• ASML’s mirrors are incredibly smooth, with imperfections smaller than a millimeter.
• If the mirror were the size of Germany, the largest imperfection would still be less than a millimeter.

Importance of ASML

• ASML’s advancements are crucial for Moore’s Law, which drives semiconductor progress.
• Improved semiconductors enable more complex algorithms and advancements in chip technology.

Why $ASML is a Unique Company

1. Pricing Power: $ASML has a monopoly on EUV machines, allowing it to increase prices and boost margins.
2. Huge Moat: $ASML’s EUV machines operate at an atomic level, making them extremely difficult to replicate.

Key Clients and Demand

1. Top Clients: $TSMC, $NVDA, $MSFT, $AMZN, $GOOG, and $META rely on $ASML’s machines.
2. Unparalleled Demand: The semiconductor market is expected to grow 7.64% annually to reach $1.14T by 2033.

Financial Performance

1. Explosive Sales Growth: Sales have quadrupled in the last decade to EUR 28B.
2. Services Revenue: Services revenue has grown 504% to EUR 5.6B, accounting for 20% of total revenue.
3. Profitability and Cash Flow: $ASML earned EUR 6.9B in profits and EUR 2.9B in free cash flow (FCF) in the last 12 months.

Future Outlook

1. Expected Growth: Net Income is expected to reach EUR 11.2B in 2026, up 61% from today.
2. FCF Growth: FCF is expected to grow 255% to EUR 10.2B in 2026.

Geopolitical Risks for $ASML

1. Key Markets: China and Taiwan are $ASML’s most important markets, accounting for 55% of revenue.
2. Major Customer: $TSMC is $ASML’s largest customer.
3. Geopolitical Tensions: $ASML is heavily exposed to tensions between China, Taiwan, and the US.

Risks:

• A Chinese invasion of Taiwan would be catastrophic.
• New sanctions or tariffs could increase costs and reduce sales.
• Current P/E: $ASML trades at a P/E of 38, despite a 19% drop in the last 6 months.
• Future Growth Expectations: Strong growth expectations bring the 2026 P/E down to 23.
• Reasonable Valuation: A P/E of 23 is considered reasonable for a monopoly with a long growth runway.

2030 Valuation

Assumptions :

• LTM Revenue: €28.26B
• 5Y Revenue CAGR: 15%
• 2029 Profit Margin: 30%
• 2029 PE Ratio: 30
• Shares outstanding: 0.390B
• Shares reduction: 1%/year

Valuation :

• Q4 2030 ASMLSHARE PRICE = 28.26 * (1.15)^5 * 0.30 * 30 / [0.390 * (0.99)^5] = €1376.31
• Using discount rate for ASML as 9%.

• CURRENT SHARE PRICE: €722.70
• DISCOUNT RATE: 9%
• FAIR VALUE: €1376.31 / (1.09)^5 = €894.41
• POTENTIAL UPSIDE: ((€894.41 – €722.70) / €722.70) × 100% = 23.75%
• EXPECTED RETURNS: (((€1376.31 / €722.70)^(1/5)) – 1) × 100% ≈ 9.02%/year
• DIVIDEND YIELD: 0.88%
• MY RATING: HOLD 🟡 | Not much lucrative risk to reward.