As results approach, is ASML stock…

2. As for China, normalization of orders and turnover is expected, but it is still difficult to say when exactly this will occur.

3. Investors and analysts will also try to get more answers on how Intel INTC’s problems may affect ASML. Intel is probably AMSL’s third largest customer, and they recently postponed the opening of a factory in Germany, which is EUV intensive. In the long run, I’m not very worried, because if Intel were to have further problems and postpone or cancel fabs, someone else would end up seizing that opportunity.

4. Overall, the long-term picture remains strong and I think the stock offers a good buying opportunity.

Morningstar key indicators for ASML

• Analyst: Javier Correonero
• Fair Value Estimate: €900.00
• Morningstar Rating: ★★★★
• Economic Moat: Wide
• Price/Fair Value: 0.84
• Morningstar Uncertainty Rating: High

Estimated fair value of ASML stock

On June 5, we raised our fair value estimate for ASML stock to €900, from €790, due to the increase in our long-term revenue and EBIT forecasts. While our estimates for 2025 remain unchanged, we have raised our long-term revenue forecast due to greater confidence in ASML’s long-term prospects and greater certainty regarding adoption of the High nitrogen intensity EUV. Our fair value represents a 2025 P/E ratio of 31.5 times.

Demand for ASML’s EUV and DUV equipment remains strong, with logic and memory fabs announcing further expansion plans through 2030. For 2025, our revenue forecast is €36 billion , approximately the midpoint of management’s forecast, and we model sales of €58 billion in 2030, compared to management’s range of €44 billion to €60 billion. We believe ASML will hit the high end of its long-term forecast, given its previous targets were set in 2022, before the adoption of artificial intelligence. Our fair value estimate represents a forward price-to-earnings ratio of 42 and 32 times for 2024 and 2025, respectively.

For the next decade, we model a 10% compound annual revenue growth rate, with EBIT margins increasing from 31% in 2023 to 45% in our terminal year. The continued long-term growth of semiconductors will require existing and new fabs to continue to acquire and maintain lithography equipment. The increase in gross margin and EBIT margin will come from operating leverage from research and development and operating expenses, as well as improved service margins, as ASML continues to focus on the improvement of this business segment and the sale of software and services. EUV and EUV High-NA (which will launch in 2025) have an estimated service revenue/equipment revenue ratio of over 150%, compared to 130% for DUV.

We believe ASML will continue to improve its installed base management (service and upgrades) EBIT margins, which are currently dilutive to the group, overall. The service business has not received due attention over the past decade as the company has focused on bringing highly complex EUV technology to fruition. We assume customer retention rates for services are virtually 100% given the complexity of lithography machines, and therefore we believe ASML can continue to sell services, consumables and upgrades. The upgrade portion of the installed base management business is margin-generating, although it can be cyclical because customers are sometimes unwilling to shut down machines and reduce productivity to implement upgrades. level. It is in the maintenance segment that ASML has the most room to improve its margins.

We expect mid-single-digit revenue growth in 2024 and 21% growth in 2025, as new fab openings in 2025 require new ASML tools. In 2025, we assume a turnover of 36 billion euros, compared to a range of 30 to 40 billion euros for management, while we model 58 billion euros in 2030, compared to a range of 44 to 60 billion euros for management. We model slightly higher R&D and SG&A intensity compared to management’s long-term forecast, as ASML will need to continue to invest in technology and productivity to justify the high price of its machines. ;

Competitive bulwark rating for ASML stock

We give ASML a broad economic competitive bulwark rating, supported by intangibles, cost advantages and substitution costs. ASML is the world’s largest supplier of photolithography machines for semiconductors, with a market share of approximately 90%. It benefits from an extensive technology gap compared to competitors Nikon and Canon, with significant investments in research and development expected to continue to widen ASML’s competitive bulwark and provide a barrier to entry.

The intangible assets come from decades of internal know-how and long-term collaboration with companies such as Carl Zeiss and scientific research institutes. Substitution costs are related to software and machine maintenance because manufacturing plants cannot afford unplanned downtime, which can cost millions of dollars.

ASML sells semiconductor lithography machines, which are used to print nanoscale patterns in chips. Its two main product lines are DUV and EUV lithography machines. DUV has been ASML’s profit engine for over a decade. It has been used since the early 2000s and is still widely used to make chips today. ASML is the only company capable of producing EUV lithography machines, which use a light source to print chip designs and are necessary to manufacture the most advanced chips used in smartphones, computers and artificial intelligence drives .

ASML’s lithography machines can print designs that are up to 30,000 times finer than a human hair. These patterns form a highly complex 3D puzzle, with dozens of interconnected layers that optimize computing performance, power consumption and heat dissipation in a chip. Moore’s lawwhich states that the number of transistors in a chip will double every two years, is becoming increasingly difficult to comply with. However, ASML’s machines continue to provide new solutions to reduce chip designs and improve power efficiency. ;

Risk and uncertainty

We assign ASML a Morningstar Rating of High Uncertainty. ASML’s machines represent a significant percentage (20-25%) of a semiconductor foundry’s capital expenditures. In most industries, customers will try to reduce the costs of their most expensive products, and ASML must therefore provide its customers with unique productivity and service value. ASML manages this risk by improving the productivity of wafers per hour and adding value each time it charges for a new service. As long as the company can continue to deliver technology and productivity improvements to its customers, we believe this risk is under control, but the company faces constant pressure to deliver or customers will attempt to reduce their reliance on technology. with regard to lithography.

Another headwind for ASML is trade tensions between the United States and China. Because ASML’s machines contain U.S. parts, the United States has the authority to limit ASML exports to China or any other country. Restrictions have become stricter since 2023, with ASML no longer able to sell some of its immersion DUV machines. If export controls continue to increase, this will put long-term pressure on ASML’s revenue.

ASML’s supply chain management is also essential. If a critical parts supplier like Carl Zeiss experienced disruptions in production, it would create a bottleneck for ASML. Historically, ASML has demonstrated good supply management capabilities. The cyclical nature of the semiconductor industry adds to ASML’s uncertainty. ASML’s machines cost up to 300 million euros, so customers postpone purchases during economic downturns. Customer concentration is high, with TSMC, Samsung and Intel accounting for a large portion of revenue.