ASML: The Backbone of the Semiconductor Industry

ASML is a global innovation leader in the microchip industry. The group is a focused supplier of lithography solutions (one of the most crucial steps in chip manufacturing) to all of the world’s major chipmakers.

Through the highly specialised equipment provided by ASML, it is capable of increasing the value and lowering the average cost of a chip. The demand for more valuable chips has been driven by the rapid digital adoption that has taken place as we move towards a more connected world.

Microchips are at the centre of all modern technology, whether it be artificial intelligence (AI) to the growing internet of things (IoT). The long-term growth of the semiconductor industry is based on the principle that the energy, cost, and time required for electronic computations can be reduced by continuously shrinking transistors on microchips (Moore’s Law). One of the main drivers of shrink is the resolution that systems can achieve, which is mostly determined by the wavelength of the light used. To enable this shrink, lithography is key. A lithography system is essentially a projection system. Light is projected through a blueprint of the pattern that will be printed (known as a ‘mask’ or ‘reticle’). With the pattern encoded in the light, the system’s optics shrink and focus the pattern onto a photosensitive silicon wafer.

An EUV (extreme ultra violet) machine is incredibly complex. A generator ejects 50 000 tiny droplets of molten tin per second. Then, a high-powered laser blasts each droplet twice – the first shapes the tiny tin, so the second can vaporise it into plasma. The plasma emits EUV radiation that is focused into a beam and bounced through a series of mirrors.

The EUV beam hits a silicon wafer allowing the machine to ‘trace’ transistors into the wafer with features smaller than 5 nanometres (nm). For comparison, the width of the average human hair is around 80 000nm.

The size of the features to be printed varies depending on the layer, which means that different types of lithography systems are used for different layers – ASML’s latest-generation EUV systems are used for the most critical layers with the smallest features.

Moore’s Law has driven the semiconductor industry – a prediction made more than 50 years ago. Gordon Moore predicted that computing power would dramatically increase and that the relative cost would decrease, both at an exponential pace.

Simply put, the number of transistors on an integrated circuit should double every two to three years at the same cost. To comply with Moore’s Law, the power, speed, and cost of microchips could either be influenced by using the same number of transistors on a chip at half the cost, or by doubling the number of transistors at the same cost.

ASML is the leader in lithography, which is significant in the making of next-generation microchips. The latest technological advances allow chipmakers to continuously increase the number of transistors on the same area of silicon. Historically, lithography has represented almost half the cost of producing cutting- edge chips.

ASML believes its EUV product roadmap is intended to drive affordable scaling to 2030 and beyond. What we have seen over the last few years, is that technology is evolving rapidly, and the next level of computing is approaching. This has already resulted in the mass adoption of mobile computing (taking our computers and phones with us), but is now moving towards an era of ubiquitous computing – having computing power available wherever we go.

The transition to ubiquitous computing is enabled by artificial intelligence of things (AIoT), which will gradually open up as IoT and AI increasingly intertwine. AIoT is a smart and connected network of devices that have the capability to communicate over 5G networks.

The convergence of wireless communication, media, and cloud through connected devices is expected to continue to drive demand for advanced semiconductors across the globe. Microchips are at the heart of these devices. Significant growth drivers of the emerging technologies are demanding new and more advanced chips that are specifically being designed for a wave of new applications.

As the world becomes increasingly digitalised, the demand for semiconductors will increase in lock-step – further driving the demand for the latest ASML machinery.

ASML’s share price has come under pressure in 2022 – falling from its high of €770/share to as low as

€390/share. This volatility has provided us opportunities to purchase the share at an increasingly attractive valuation. The decline has been underpinned by several risks faced by the broader semiconductor industry, which we believe will have a far lesser impact on ASML. Primarily, the semiconductor export controls implemented by the US on China has dented investor confidence. This applies to all advanced semiconductor machinery shipped into China. Given the significance of China to the industry as a whole, we have seen broad based declines across the peer group. Where ASML differentiates itself from the peer group in this regard, is that it has already been restricted from providing Chinese chip manufacturers with EUV machinery.

It also derives a far lower proportion of revenue from China at 15% compared to around 30% at its peers.

ASML has continued to ship non-EUV tools out of Europe and into China and expects the direct impact of the newly implemented export controls to be fairly limited. There is also very little US technology included in the machinery, further limiting the likelihood of further export restrictions.

Following the idiosyncratic demand shock that took place at the onset of COVID and the related lockdowns, there was a significant shortage of chips in the market. Demand for personal electronics surged, resulting in the subsequent shortage of chips to be used elsewhere. This was further exacerbated by the supply chain disruptions we have experienced over the last two years, placing additional pressure on an already strained supply chain. As the chip shortages worked themselves out and supply chain pressures have eased, shortages have been replaced by a modest oversupply.

This has been further evidenced by several foundries reducing capital expenditure budgets to help weather end-market weakness in the coming quarters. While this is typically a red flag for wafer fabrication equipment suppliers, like ASML, the group has continued to grow its order book at record levels each quarter. With net bookings in the last quarter at €9 billion, ASML now boasts an order book of over €38 billion – almost two years’ worth of revenue to be recognised in future. We do not believe the market fully appreciates the defensiveness that this provides to the company’s top-line.

Despite a handful of companies delaying the preferred time to receive their orders, most customers are actually eager to receive their orders earlier. This shows that the lion’s share of customers are building capacity beyond 2023 and are continuing to invest despite the looming semiconductor downturn. By delaying machinery orders, foundries risk falling behind their peers when demand ultimately rises.

While there is uncertainty around the industry in the short-term, the long-term growth outlook remains unchanged. Any future technological advancements will likely be underpinned by ASML’s machinery. Operationally, it has proven itself resilient in a time of uncertainty and it has continuously illustrated that the demand for its machinery far outweighs the supply. It operates as a monopoly in one of the most crucial chip manufacturing processes (EUV) and as many EUV machines as ASML can produce, its customers will purchase.