Netherlands-based ASML (ASML) is one of the undisputed leaders in the manufacture of semiconductor components. Its machines, particularly those utilizing extreme ultraviolet (EUV) lithography, are critical for producing the most advanced microchips. These chips power the technologies from artificial intelligence to 5G networks and electric vehicles. From a closer look at the company’s robust balance sheet and considering the growth potential, I can see a strong case that shares are currently significantly undervalued.
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I’m bullish on the entire AI sector as it advances daily, with ASML looking to be one of the best investments available.
Building Dominance in Lithography
What puts the company in a category of its own and solidifies my bullish position on ASML stock, is its unparalleled dominance in lithography, the intricate microchip manufacturing process to etch billions of tiny transistors onto silicon wafers. As chipmaking giants like TSMC (TSM), Samsung (SMSN), and Intel (INTC) race towards smaller, more powerful chips, ASML’s EUV machines are now virtually indispensable. Interestingly, ASML is currently the only company in the world capable of producing chips at cutting-edge nodes of 5 nanometers and below. So, it’s no exaggeration to consider it the beating heart of semiconductor innovation.
Of course, building this dominance hasn’t come cheaply. EUV machines cost well over $150 million each, and their development has required enormous investments, both in research and in actual development. However, recent financial performance shows this is now starting to pay off. In the latest quarter, ASML reported €7.5 billion in sales and €2.1 billion in income, with an impressive gross margin of 50.8%. For the year ahead, management projects revenues of €28 billion. In an industry known for cyclical volatility, these are clearly very robust figures, signifying some real confidence in the future from management.
ASML Growing Alongside New Technology
The semiconductor industry is clearly in the midst of a historic level expansion fueled by several global megatrends. Technologies like AI, autonomous vehicles (AV), and advanced cloud computing drive insatiable demand for the most powerful, energy-efficient chips. Chipmakers invest large amounts, and ASML directly benefits as the tool supplier, making me bullish for its long-term prospects.
The latest breakthrough, High-NA EUV lithography, could further cement this leadership. Slated for rollout in 2026, this precision technology will enable chip production as small as 1.4 nanometers. This represents a significant leap, and ASML is already securing pre-orders from major clients. I believe this could extend dominance for at least another decade.
Despite involvement in various geopolitical tensions, particularly around Taiwan’s semiconductor production, China represents another growth opportunity. Although export restrictions have limited the company’s ability to sell EUV machines to Chinese customers, demand for older systems and service contracts remains very strong. This ensures that ASML retains a foothold in an enormous, critical market while navigating the near-term complexities of international trade.
Potential Undervaluation of ASML Shares
I’d say one of the underappreciated aspects of the firm’s business model is recurring revenue from the installed base. With thousands of systems already in place worldwide, ASML generates a consistent income from servicing and upgrading these. In the last quarter alone, service revenues contributed over €1.5 billion. This predictable income adds stability, reassures investors, and offsets the cyclical nature of other sales.
I’m encouraged to see the company boasts a robust balance sheet with €7 billion in cash and has a fairly manageable debt-to-equity ratio of 29.1%. This financial resilience enables ASML to fund aggressive research and development while maintaining shareholder returns through dividends and impressive share buybacks in the last decade. In an industry where innovation is necessary, ASML’s ability to sustain high R&D spending, support investors, and improve the balance sheet is a critical advantage.
As a result, I’d suggest that the market underestimates ASML’s value here. Some analysts estimate the stock is currently trading about 11% below its fair value based on a discounted cash flow (DCF) calculation. With an average 12-month price target of €844.52, this represents a potential upside of over 27%.
So, while ASML’s price-to-earnings (P/E) ratio of 37.7x and price-to-sales (P/S) ratio of 9.9x may appear rather high compared to broader market averages, I would argue that these multiples are justified by its near-monopoly in EUV lithography. Looking at other companies in the sector tend to somewhat back this up, with Teradyne equally high at 35x, Lam Research slightly lower at 24x, and KLA at 30x.
Mitigating Sectoral Risks
Despite my bullishness, of course, with high-valuation companies in a sector with momentum, there are plenty of risks. The industry is notoriously cyclical, and macroeconomic slowdowns could easily impact short-term demand, sending investors to the exit door. Geopolitical tensions between the U.S. and China remain a significant challenge for the sector. High R&D costs are another factor I’d be keeping one eye on as an investor; in the last quarter alone, ASML invested €1.1 billion on research and development. While this spending level is essential to maintaining a technological edge, it can weigh heavily on margins and investor confidence during periods of weak demand.
Despite the challenges, I believe ASML is exceptionally well-positioned. Its commanding market position and secular growth trends provide a compelling investment landscape. The upcoming rollout of high-NA EUV technology, in particular, could unlock a new wave of revenue and profitability, which the market may not fully reflect in the current share price.
Summing Up
I see ASML as a rare balance of stability, growth, and innovation. The company is potentially at the forefront of a growth boom, and its tools are enabling breakthroughs across countless industries. As demand for semiconductors expands, I see ASML as a driving force.
In my view, the market has yet to fully appreciate ASML’s potential. The company offers a compelling case for sustained growth with robust financials, dominance in lithography, and various other revenue streams. I see ASML as more than just a solid investment—it’s potentially a huge winner over the coming years.
