This ASML Stock Forecast article was written by Milana Papadopoulou – Financial Analyst at I Know First.

Highlights

• ASML’s monopoly in the production of Extreme Ultraviolet lithography machines places it at the centreof this technological advancement.
• U.S.-China trade disputes have led to export restrictions on advanced lithography equipment.
• Based on DCF Analysis ASML stock is overvalued

ASML Stock Forecast: Overview

ASML Holdings (Advanced Semiconductor Materials Lithography) was founded in 1984 in the Netherlands. It specialises in developing and manufacturing photolithography machines, which are used to produce semiconductors. As of 2023, it is the largest supplier of the semiconductor industry and the sole supplier in the world of extreme ultraviolet lithography (EUV) photolithography machines required to manufacture the most advanced chips. As of November 2024, ASML was the fourth most valuable company in Europe and the second most valued European tech company, with a market capitalisation of about US$264 billion. The company is listed on the AEX and NASDAQ Stock Exchanges as ASML. It is also a component of the Euro Stoxx 50 and NASDAQ-100. Its current share price is €650 (as of 25/10/2024)

Importance of ASML Stock’s Performance

ASML’s stock performance is critically significant, not only for investors but also for the broader technology sector. The company holds a pivotal role in driving the progression of Moore’s Law—the principle that predicts the doubling of transistors on integrated circuits approximately every two years, enabling smaller, faster, and more energy-efficient chips. 

ASML’s monopoly in the production of Extreme Ultraviolet (EUV) lithography machines places it at the centreof this technological advancement. EUV machines are indispensable for manufacturing cutting-edge semiconductors, as they allow for the production of chips with features smaller than 7 nanometers. 

With no direct competitors capable of producing EUV systems at scale, ASML has cemented itself as an irreplaceable supplier to leading semiconductor manufacturers. This unique positioning ensures its influence over the semiconductor supply chain and underpins its strong stock market performance.

ASML Stock Forecast: Global Semiconductor Market Trends

The global semiconductor industry is experiencing robust growth, with projections of 15-20% in 2024, reaching $630 billion and potentially surpassing $1 trillion by 2030, driven by AI, big data, and IoT. AI’s synergy with semiconductors is reshaping the industry, particularly through surging demand for GPUs and high-bandwidth memory (HBM), essential for AI and data centres. 

Analysts forecast a 284% increase in HBM revenue in 2024, reaching $12.3 billion, and further growth to $21 billion in 2025, with over 40% dedicated to AI inference tasks by 2026. Emerging sectors like new energy vehicles and smart manufacturing are also bolstering demand, advancing technologies like energy management and intelligent systems. 

Competition Analysis

ASML enjoys a monopoly in the EUV market. The firm’s decades-long investment in EUV technology, backed by partnerships with research institutions and major chipmakers, has given it a significant lead. EUV machines involve complex optics and precision engineering that competitors have not been able to replicate.

In the less advanced DUV (Deep Ultraviolet) technology, ASML faces competition from Nikon and Canon. While Nikon has a strong reputation, it lacks the technological capabilities to rival ASML in the EUV segment, leaving it limited to the trailing-edge and mid-range chip markets. Canon also operates in the DUV lithography space but focuses mainly on older nodes and specialised markets such as displays and MEMS (micro-electromechanical systems). 

ASML collaborates with specialised suppliers for high-precision optics to maintain a competitive edge in production quality and scalability. Another advantage is that ASML makes sure to secure long-term exclusive contracts with its customers like TSMC, Samsung and Intel.

Geopolitical Factors

Geopolitical tensions pose significant risks to ASML. U.S.-China trade disputes have led to export restrictions on advanced lithography equipment. Thus limiting ASML’s market access in China, a key semiconductor hub. 

Additionally, escalating concerns over technology security and national dependence have spurred nations to localise chip production, potentially disrupting ASML’s global supply chains.

 Efforts by China to develop domestic alternatives could erode ASML’s dominance in the long term. Although ASML is a Dutch company, its management has insisted in multiple public speeches that it has to abide by US regulations due to its suppliers and customers operating in the US market. Therefore, sanctions and regulatory pressures following the latest US-electoral outcome could slow international collaborations and impact revenue streams, underscoring the industry’s vulnerability to shifting political landscapes and international trade policies

Sustaining Innovation

ASML faces inherent limits to innovation due to the extreme complexity and cost of developing its products. EUV lithography systems are already at the cutting edge, with each machine requiring years of R&D and costing over $200 million. Further advancements, such as High-NA EUV machines for even smaller nodes, face diminishing returns in transistor scaling, as physical and quantum limits challenge the practicality of Moore’s Law. 

Additionally, technological hurdles in optics, power sources, and wafer handling increase development risks. These constraints, combined with escalating costs for customers, could slow adoption rates, potentially capping future innovation and market growth for ASML.

Business Segments

ASML’s revenue is primarily driven by its systems and services segments. The largest portion comes from its Extreme Ultraviolet (EUV) lithography systems, which are essential for producing advanced semiconductor chips. These high-cost machines contribute significantly to ASML’s income. 

Additionally, Deep Ultraviolet (DUV) lithography systems also represent a notable share of revenue, catering to the production of chips at more mature nodes. A substantial portion of ASML’s revenue also comes from its services segment. It includes ongoing support, maintenance, software updates, and upgrades for its installed base of machines. Overall, ASML’s business model is heavily reliant on the continued demand for advanced semiconductor manufacturing equipment, particularly EUV systems.

Financial performance

ASML’s financial performance reflects its dominant position in the semiconductor industry. In recent quarters, the company has reported revenue growth, driven by surging demand for its EUV and DUV lithography systems. For 2023, ASML achieved a revenue of approximately €29 billion, with net margins exceeding 30%, highlighting strong operational efficiency. Its order backlog remains healthy, with demand from leading chipmakers like TSMC and Samsung for advanced nodes powering growth.

Earnings per share (EPS) have steadily increased, fueled by rising demand and a strong focus on cost control. Free cash flow has also shown resilience, enabling ASML to maintain a shareholder-friendly approach through dividends and share buybacks. While geopolitical challenges and export restrictions to China have posed revenue risks, the company has effectively diversified its customer base.

ASML Stock Forecast: Discounted Cashflow Analysis

Despite strong revenue streams and a favourable competitive position, Discounted Cashflow analysis suggests that ASML is overvalued.  Its implied equity value per share based on the perpetuity growth approach is €611. The figure is based on a discount rate of 7.8% and a terminal growth rate of 3.5%. The revenue projections are conducted for FY 24-28, with an average growth rate of 20% y-o-y. This growth figure is established by inspecting the average revenue growth and excluding the outliers. The rest of the firm’s EV is based on a terminal value calculated as a growing perpetuity. 

The WACC figure is calculated based on the firm’s current capital structure. Since the firm is practically debt-free, a significant percentage of the cost of capital holds the market risk premium. The risk premium is based on the average figures for EU companies in the market for semiconductors. 

The terminal growth rate is taken as 3.5%. This is an appropriate figure as ASML is a mature company. Also, the majority of its growth prospects are based on the ability to continue growing the sales of extremely expensive machinery to a limited number of market participants. As such modelling assumptions rely heavily on the values of the terminal growth rate and discounting factor, a sensitivity analysis is also conducted. Such analysis provides a range of €424 to €1,125 per share.

ASML Stock Forecast: Conclusion

Despite fundamentals being positive, I believe ASML stock to be a “Hold/Sell” based on DCF analysis. The firm has strong profitability, and many analysts’ projections are bullish. But I believe the “semiconductor craze” has led to an inflated valuation of the stock. Some analysts forecast significant growth as they factor in the previous three years’ growth to continue long into the future. I believe that this notion is misguided.  ASML is a solid company with strong financial performance. However, its growth is highly reliant on the ability to push technological boundaries, which are approaching their limiting value.

It is worth paying attention that the stock-picking AI of I Know First has a high signal on the one-year market trend forecasts, supporting my position for the ASML stock forecast. The light green and light red for the short-term forecasts are mildly bullish and midly bearish, while the darker red is a strong bearish signal for the one-year forecast.

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