ASML Has A Lot To Live Up To

In terms of moats, how do you not love ASML (ASML)? Not only is the company almost the only game in town in deep ultraviolet lithography (or DUV) with around 85% share, they are the only game in town in next-gen extreme ultraviolet lithography (or EUV), a new product category that will start to contribute much more meaningfully to revenue in the second half of 2019 and into 2020 and beyond. As lithography is a critical step in chipmaking, that puts ASML in a commanding position in a critical part of the foodchain, particularly as EUV tools are effectively essential for chip nodes below 7nm (and useful at 7nm).

There are some points of controversy around the stock, particularly with respect to the ramp timeline for EUV tools, how deeply EUV tools will penetrate the memory segment over the next few years, and the sort of gross margins that the company can really generate. The bigger issue for me, as an investor, is valuation. A virtual monopoly supplier in a growing industry certainly deserves a premium, but I’m not entirely comfortable with what looks like a prospective annual return on the low end of the high single-digits.

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ASML Has A Lot To Live Up To