High-end semiconductor manufacturing, the underlying technology behind AI development, is a close-knit industry. The development and design of advanced computer chips is dominated by American technology firms equivalent to Nvidia and Intel. Taiwanese giant TSMC has a near monopoly on the actual manufacturing of US-developed chips. Producing 92% of the world’s most advanced chips in his factories.
And then there may be ASML. Founded within the Netherlands in 1984, the lesser-known company dominates its own area of interest: constructing and selling the highly specialized, high-end machines that TSMC and other foundries depend on to provide and package semiconductors. ASML may not attract as much attention as other chip firms, nevertheless it is a very important a part of the semiconductor supply chain, and the $362 billion company is poised to profit hugely from the AI boom.
“At a high level, ASML is more than well positioned,” said Michelle Brophy, research director for technology, media and telecommunications at research platform AlphaSense Assets. “I wouldn’t bet against ASML.”
But that does not imply there aren’t bumps within the road: This week’s lower-than-expected sales numbers led to a sell-off in stocks, and ASML is caught within the political crossfire of the U.S.-China semiconductor arms race. However, as recent chip production facilities subsidized by the CHIPS Act come online within the US, ASML should profit.
Semiconductor manufacturing is an incredibly technical process that relies on specialized equipment and expert employees to design and construct ever smaller and more powerful computer chips. From the Fifties to the Nineties, it was common for chipmakers like Intel to regulate every step of the method, from design to manufacturing. But as engineers began inventing smaller and more powerful chips, the business model shifted toward specialized firms that focused on a single a part of the method.
Today, only a couple of area of interest firms dominate the worldwide advanced chip supply chain. Nvidia currently focuses solely on design and doesn’t do any manufacturing designs greater than 90% of the chips used for AI development. TSMC, which doesn’t design itself and only accepts manufacturing orders for its factories, has a near monopoly on the physical production of AI chips.
And ASML has perhaps the deepest area of interest of all: exclusive ownership of the highly specialized equipment that TSMC uses in its factories.
The most significant tool in modern chip manufacturing is the intense ultraviolet (EUV) lithography machine. The high-quality, high-performance chips for AI are manufactured using an EUV lithography machine, which etches tiny designs onto extremely thin silicon wafers, that are then stacked and combined into chips.
“If you look at a gang box – where you walk through a door, you can flip a switch and turn on the fan, and a switch to turn on the light, and a switch to turn on the other light – behind the wall, you copper wires have. It is [the same principle as] semiconductors,” said Mike Russo, president and CEO of the National Institute for Innovation and Technology Assets. “By performing EUV through ASML, they were able to reduce features to one fifty-thousandth of a hair. Think about the amount of wires you actually put on a layer of a chip instead of the copper wire on your wall.”
EUV lithography machines cost a whole lot of hundreds of thousands of dollars – and ASML is the one company on the earth that produces them. Each machine accommodates over 100,000 parts they usually are so large that three jumbo jets are required to move them. The cost and complexity of ASML’s business have helped protect the corporate from competition.
“The tools are so expensive,” Russo said. “A brand new EUV tool from ASML is prone to cost $250 million. A tool.”
Investors dealt ASML a setback on Wednesday after lower-than-expected order numbers led to a sell-off that sank share prices by around 7%, although CEO Peter Wennink reassured investors that the sales decline was temporary and the corporate would post stronger numbers within the second half of the 12 months expected the 12 months. But Brophy said the decline was likely more an element of investors’ astronomical expectations for firms within the AI space than any deeper threats to ASML’s business.
“In my opinion, the situation is not particularly good for AI companies just because they are prepared for perfection… any disappointment with the numbers would provoke a negative reaction,” Brophy said. “I really don’t see a long-term problem with the business.”
One reason for investor concern – and a possible threat to ASML’s future business – is ASML’s position amid the continuing rivalry between the US, Europe and China for supremacy in semiconductor production.
The Biden administration introduced export controls in 2022 that prevent American chip designers like Nvidia from sharing their most advanced designs with Chinese manufacturers. The American authorities have also done this has pressured the Dutch government and ASML to limit sales to China and stop providing maintenance services to Chinese firms as China seeks to expand domestic chipmaking capability and wean itself from dependence on Western chip designers and Taiwanese foundries. China was ASML’s largest market last 12 months, generating a couple of third of its revenue.
“China always opposes the US overstretching the concept of national security and putting forward various excuses to force other countries to impose a technology blockade against China.” Chinese Foreign Ministry spokesman Wang Wenbin said this in January.
Brophy said a possible escalation between the US and China over semiconductor policy would affect not only ASML but your entire chip market.
“Overall, does it pose a risk? That’s the case,” Brophy said. “It is not an ASML risk, but an aggregate demand risk… a sharp escalation between the two countries would, in my opinion, impact the demand picture in the longer term.”
China notwithstanding, ASML sees upside potential next 12 months: CFO Roger Daasen predicted “an industry recovery in 2024 and… a stronger year in 2025.” Much of this optimism is attributable to a lot of recent American semiconductor manufacturing plants, or fabs, being built using CHIPS and Science Act money, which could offset any lost sales in China.
In the previous couple of weeks alone, the Commerce Department has announced greater than $20 billion in grants for brand new factories from TSMC, Intel and others Samsung. That will likely mean a gentle stream of orders for ASML equipment, which is important to creating the advanced AI chips that the Biden administration is desperate to move overseas.
“If a client were to leave, and I don’t think that’s the case, there would be another one in line to take their place because there are so many projects going on right now,” Brophy said. “The US CHIPS Act has already allocated $12 billion [TSMC] and another $6 billion for Samsung alone, Intel is also there. They all build factories in the USA. But let’s not forget that [other] Geographies like Japan –[TSMC] has already invested more than $20 billion in facilities there.”
ASML has built up a dominant market position in a highly specialized area of interest and has almost completely shielded it from competition. Current Chief Business Officer Cristophe Fouquet can have big shoes to fill when he takes over as CEO later this month – his predecessor drove a 1,400% rise in the corporate’s share price. But overall, the outlook is nice: AI’s seemingly insatiable demand for advanced chips and ASML’s nearly insurmountable lead within the equipment space are major tailwinds that show no signs of slowing.
