ASML Holding: Unparalleled Moat, Great Prospects

ASML Holding (ASML) is one of the most prominent chip-making equipment manufacturers in the world. ASML boasts a unique competitive advantage when it comes to its patent-protected EUV capabilities, which have helped the company essentially create a legal monopoly in the space. As a result, ASML is well-positioned to continue growing and dominating the industry for years to come, backed by its ever-growing backlog.

I remain bullish on the stock.

ASML’s Moat

The long-term evolution of the semiconductor industry is founded on the principle that the energy, cost, and time needed for electronic computations can be decreased by contracting transistors on microchips. This is exactly what ASML’s lithography systems can achieve, which is primarily resolved by the wavelength of the light utilized and the numerical aperture of the optics.

With ASML being the only player in the world that offers EUV lithography systems, the majority of semiconductor manufacturers out there are in great need of the company’s products and services.

Hence, by holding ASML, investors do not need to guess or speculate which semiconductor player will be the dominant one over the next decade. ASML is set to benefit from the growing demand for semiconductors regardless of that.

Semiconductor sales are expected to grow by a CAGR of 7.1% through 2026, essentially ensuring a growing backlog for ASML. It’s also worth noting that due to its outlandish moat, ASML is likely to be the dominant supplier of semiconductor solutions even in the next generation of semiconductor manufacturing. Lithography research is incremental and demands progressive refinements.

To put it differently, it’s virtually unattainable to overtake an industry leader since you can’t skip a generation of expertise and manufacturing technology.

Latest Results 

ASML wrapped up Fiscal 2021 on a great note, delivering excellent growth year-over-year. In Q4, revenues came in at $5.7 billion (€5.0 billion), resulting in Fiscal 2021 revenues of $21.1 billion (€18.6 billion). This suggests year-over-year growth of 24.1%. ASML also reported net bookings of €7.1 billion, suggesting a robust short-term outlook.

I am particularly enthusiastic regarding ASML’s ongoing margins expansion, which is accomplished through advancing economies of scale. Gross margins in Fiscal 2021 were 52.7%, compared with 48.6% in fiscal 2020.

Accordingly, net income margins also expanded, with ASML posting €5.9 billion in net income for the year, or €14.36 per share. This implies a year-over-year growth of 69.1%, clearly well-above revenue growth, demonstrating ASML’s current margin expansion trajectory.

For Q1, management expects net sales between €3.3 billion and €3.5 billion. At first glance, this implies lousy performance versus the prior-year period’s €4.36 billion in net sales.

However, this is only due to a substantial number of fast shipments, leading to approximately €2 billion of expected revenue shifting from Q1 to the succeeding quarters. In fact, even taking into account this current “technical” issue, management expects revenue growth to be close to 20% in Fiscal 2022, which implies hardly any deceleration versus Fiscal 2021.

Demand for the company’s one-of-a-kind technology stays very high. Due to the company operating through its backlog, ASML’s only problem in terms of its revenue growth is its own ability to increase its capacity to meet said backlog.

Dividend and Valuation

ASML’s dividend should grow rapidly over time. However, it should also remain at tiny levels as the company is still reinvesting back into the business.

With respect to Fiscal 2021, ASML intends to declare a total dividend of €5.50 per ordinary share, implying a tremendous 100% increase compared to Fiscal 2020’s total DPS of €2.75. Yet, at ASML’s current price levels, this suggests a (forward) yield of just around 0.97%.

Hence, while the company’s dividend-growth prospects are apparently fantastic (the payout ratio over Fiscal 2021’s EPS is just around 38%), investors should expect to enjoy most of their future total returns in the form of capital gains.

Still, it’s worth noting that as part of ASML’s financial policy to return excess cash to its shareholders, the company intends to repurchase around €9 billion worth of stock through 2023, which equates to around 3.8% of its current market cap. Hence, ASML’s combined investor yield should be close to 4% through 2023.

However, is the stock fairly valued here, or do investors, along with the company itself (through buybacks), overpay for ASML shares? Analysts expect Fiscal 2022 EPS to land close to $18.3. This implies a forward P/E of 33.6.

It is certainly not a cheap multiple, but considering ASML’s unparalleled moat, its clear runway for sustained domination in the space, and double-digit EPS growth expectations in the medium term, I would say it’s a rather fair one.

Wall Street’s Take

Turning to Wall Street, ASML Holding has a Hold consensus rating based on two Buys, one Hold, and one Sell assigned in the past three months.

At $865.02, ASML Holding stock projections suggest 40.5% upside potential.

Conclusion 

Few companies feature such a deep moat as that of ASML. The company’s role in the semiconductor industry is practically irreplaceable. If you are bullish on the semiconductor industry, there is a good reason to be bullish on ASML.

With the company delivering continuous growth, growing its bookings, and providing a robust outlook for Fiscal 2022, nothing has fundamentally changed regarding its bullish investment case. While shares may not be particularly cheap, I doubt investors will ever be able to get their hands on ASML stock at a discount.

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