ASML Holding

ASML announced last quarter plans to expand low-NA EUV and immersion DUV capacity by 30% in 2027 and another 30% in 2028. These plans seem already outdated, as management has acknowledged that this might not be enough to meet customer demand.

Why it matters: ASML’s backlog keeps growing, with 2027 fully booked and significant order intake already for 2028. In our view, the most important disclosure from these earnings was that ASML is having first conversations with customers for 2029 and 2030 orders. DRAM makers seem the most open to talking about 2029-2030 already. While we still see some upside to our 2028 revenue and EPS forecast as ASML tries to expand capacity beyond 30% with its existing footprint, we believe most of it is already priced in. What could push the stock higher is order visibility that confirms 2029 and 2030 as “growth years.”

The bottom line: We maintain our wide Morningstar Economic Moat Rating and EUR 1,800 fair value estimate. After 28% sales growth in both 2027 and 2028, reaching EUR 56 and EUR 71.5 billion respectively, we model a return to low-double-digit growth in 2029 and 2030, with sales reaching EUR 88 billion in 2030. Should management confirm the first 2029 orders over the next six months, our 2029-2030 forecast would gain credibility, and the stock price could converge toward our fair value estimate. Our bull case would require 2029 to book as quickly and as fully as 2028 has. If customers place orders at a fast pace in the coming months, sales growth in 2029-2030 could exceed our low-double-digit forecast.

Key stats: Beyond expanding capacity, ASML continues to aggressively develop upgrades to low-NA EUV and immersion DUV output. Installed base management revenue reached EUR 3.3 billion, EUR 400 million higher than expected thanks to the upgrade business, as customers look to extract more productivity from their machines. Upgrades were the main driver of the 57.5% gross margin this quarter, above guidance of 55%-57%.

The Low-NA EUV NXE:3800F will launch in 2027, with output growing to 260 wafers per hour from 230 for the NXE:3800E currently. Given the 13% productivity increase, this should let ASML raise EUV pricing by at least 7%, sharing roughly half of the benefit with customers. Given that management hinted last quarter it is ready to unlock more pricing power, the increase could potentially exceed 7%.

Our fair value estimate for the ADR shares is $2,050 per share.

We expect 2026 and 2027 sales of EUR 44 billion and EUR 56 billion, respectively. The medium-term outlook has improved meaningfully since the summer of 2025, and ASML is positioned to expand Low-NA EUV and DUV immersion capacity by up to 70% from 2026-28. While our previous 2030 revenue forecast was anchored to the top end of ASML’s long-term guidance of EUR 60 billion, this number now looks irrelevant, as we estimate ASML will deliver more than EUR 70 billion in revenue and EUR 71 in EPS already in 2028, even without fully utilizing its expanded capacity. We estimate 2030 sales could exceed EUR 87 billion, as ASML optimizes its existing footprint in Veldhoven while adding new capacity at Brainport from 2029 onward. After a 28% 2026-28 sales CAGR, we model low-double-digit growth in 2029-30, as growth moderates after the ambitious expansion.

Memory makers Samsung, SK Hynix, and Micron are citing a shortage of high-bandwidth memory capacity, driven by AI demand, that could last at least until 2028. Memory makers are deliberately expanding capacity more carefully to avoid the mistakes of past cycles, in which oversupply and price crashes hurt the market.

For the next decade, we model a 15% revenue CAGR. The continued long-term growth in semiconductor fabs, the migration of new chip layers to EUV lithography, and machine price increases are ASML's main growth drivers. Gross margin and EBIT margin expansion will come from higher volumes and cleanroom utilization, operating leverage of R&D and other operating expenses, more expensive EUV machines at better gross margins, and an improvement in EUV service margins.

Service revenue also contributes to long-term revenue growth as more complex machines reach the field with 30-year average useful lives. Low-NA and high-NA EUV have an estimated service revenue/equipment revenue ratio of more than 150% over their lifetimes, compared with DUV’s 130%. We model EBIT margin expansion from 33% in 2025 to 45% in our terminal year.

We assign ASML a wide Morningstar Economic Moat Rating supported by intangible assets, cost advantages, and switching costs. ASML is the world's largest supplier of lithography machines for semiconductors, with 90% market share worldwide and a large technology gap versus competitors that keeps widening due to continued research and development spending. Intangibles come from decades of internal know-how and supply chain relationships. Switching costs come from software and servicing of the machines; fabrication plants cannot afford unplanned downtime, which can cost millions of dollars.

ASML's main product lines are immersion DUV and EUV lithography machines. Immersion DUV has been ASML’s cash cow since the early 2000s and is still widely used to manufacture many chip layers today. ASML is the only company capable of producing EUV lithography machines, which use a laser plasma light source to print chip patterns and are required to manufacture the most advanced logic and memory chips used in data centers, smartphones, and computers. EUV can print patterns that are up to 30,000 times thinner than a human hair. These patterns form a highly intricate 3D puzzle of transistors, with dozens of interconnected layers that optimize computational performance, energy consumption, and heat dissipation. Moore’s law, which states that the number of transistors in a chip will double every two years, is becoming more challenging to achieve. However, the industry has found workarounds to create 3D transistor structures to continue improving semiconductors' power efficiency.

ASML machines are a very complex combination of physics, electrical, and mechanical systems. An EUV machine takes 12-18 months to be assembled, weeks to get installed, and can occupy dozens of square meters and weigh up to 200 metric tons. These machines have so many subsystems that, according to ASML, a single engineer would not be able to understand the entire machine, but only their area of expertise. ASML’s lithography machines are the result of the assembly and integration of thousands of high-quality supply parts, with ASML acting as the coordinator and assembler. Machines are also the result of decades of internal know-how, R&D, and partnerships with firms like Carl Zeiss or research centers like Imec. ASML’s executive vice president of technology, Jos Benschop, said in an interview on Dutch television station VPRO in 2022: “You could put 10,000 intelligent people in the same room, give them all the drawings of our machine, and the machine wouldn’t work. Some things are simply not in the drawings.”

In our view, Nikon and Canon are no match for ASML. Immersion lithography is the most advanced machines Nikon and Canon can manufacture, and even then there is a big performance gap versus ASML's immersion machines. Even if Nikon or Canon tried to replicate ASML’s EUV machines, they would need to make the technology viable on their own, replicate ASML's immense supply chain, and would need decades to improve the technology. ASML has very long-term relationships with its customers, providing firsthand knowledge of fabs' pain points and an advantage when deciding where to innovate.

A decade ago, TSMC, Samsung, and Intel invested EUR 4 billion to fund the development of EUV and redesigned their fabs to make them ready for this technology. Even if a new and viable lithography technology that could compete with ASML’s EUV were developed, fabs would have to be entirely redesigned for this purpose, an endeavor that would cost billions and that we consider very unlikely. Canon, for instance, invests EUR 2.2 billion (JPY 300 billion) per year across four divisions, with lithography representing less than 10% of group revenue, compared with ASML’s R&D budget of more than EUR 5 billion, which is purely focused on lithography. This huge gap seems virtually impossible to close at this point.

Even if a competitor did manage to create machines as precise as those of ASML, it would still need to deliver the same uptime and manufacturing yield. Fabs have enormous fixed costs, so they need to function 24/7 to generate the necessary economies of scale to be profitable. In addition, lithography machines are normally the bottleneck of the plant, meaning a 30-minute downtime can cost millions of dollars to a foundry. ASML’s DUV and EUV machines have uptimes north of 95%. For example, Chinese lithography company Shanghai Micro Electronics Equipment claims to have reached the 5-nanometer process node. Even if this is true, it is highly debatable whether these machines can function at an acceptable uptime and provide a proper manufacturing yield. The semiconductor value chain is highly globalized, and we believe China lacks the geopolitical connections, engineering capabilities, and know-how to replicate ASML’s lithography machines at the same level of technology and reliability.

Once a lithography machine is sold, the customer is locked in for its lifetime, and machines that were shipped 30 years ago are still generating service revenue today. ASML's installed-base management business focuses on servicing, upgrading, and software for the machine. Third-party service providers lack the technical skills to service these machines, but even if they could, we doubt customers like TSMC would risk using an unverified service provider given how crucial they are. During its lifespan, an ASML immersion DUV machine will generate 130% in service revenue compared with equipment revenue. This number goes to 150% for low-NA EUV equipment given its higher complexity, with high-NA EUV potentially above 150%. ASML also offers software and hardware upgrades for its customers. A customer that owns a machine can step up productivity with some investment and a few weeks of downtime. Although upgrades are still expensive, they are still cheaper than purchasing a new machine, so customers find value in this proposition.

ASML’s machines can last 30 years, providing recurring service revenue. The switching costs and intangible assets required to displace these machines are enormous, with no competitor coming close to ASML’s technological leadership.

AI is driving strong semiconductor demand, which results in more fabs and more demand for tools across logic and memory markets.

Output gains support price increases whenever new machine prototypes are introduced. Product platforms can share many parts and subsystems, facilitating standardization, shorter lead times, and procurement savings.

ASML sells a low-volume, high-price product. Lithography machines represent a high proportion of customers' costs, so if the company fails to innovate, customers will look for alternatives.

If controls on exports to China worsen, ASML’s near-term growth might suffer. The firm has no effective control over this risk, as it largely depends on US government decisions.

The cyclical nature of the semiconductor industry adds to ASML’s risk profile. Also, ASML depends on a limited number of suppliers for certain components, so any disruption could create bottlenecks and delays.