ASML: The Art Of Competitive Advantage

| About: ASML Holding (ASML)


ASML has a close relationship with its customers, for example Intel.

Innovation is the driving force behind ASML's succes.

ASML holds a monopoly position in the lithography market.

Software and services could deliver additional growth.

ASML has strong fundamentals and is a good long-term investment.

ASML Holding N.V. (ASML), a Dutch semiconductor equipment and machinery maker, has been one of my favorite stocks in my portfolio for some time now. Although most investors are interested in the general tech and semiconductor businesses, ASML has only 1,700 followers on Seeking Alpha. According to the number of followers, not many investors share my interest for this company. Too bad, especially since ASML's innovative equipment and machinery are vital in the semiconductor industry. In this article, I will argue why ASML is a great long-term investment for investors who are looking for alternative investment opportunities within the semiconductor industry.

ASML was founded in 1984 and is based in Veldhoven, The Netherlands. The company designs, manufactures, markets and services full semiconductor processing systems. ASML is all about innovation and developing better and more efficient equipment for clients in the semiconductor industry. Not surprisingly, all major chip makers, like Intel (NASDAQ:INTC) and Taiwan Semiconductor Manufacturing Company (NYSE:TSM), are among ASML's main customers. Last year, several of ASML's large customers made significant investments in ASML to develop and market new products (see this news release). Some of ASML's most important customers are among the company's major shareholders as well. This indicates the importance of ASML's product for companies like Intel and Taiwan Semiconductor.

EUV technology

By far the most promising innovation is the development of extreme ultraviolet (hereafter: EUV) lithography machines. ASML develops this new technology to allow smaller chips and to increase overall chip wafer capacity. According to ASML: "high maximum wafer scanning speed allows optimal use of the source intensity over the largest possible range of resist sensitivities and exposure doses" (source: I have to admit that the technology side of this development is beyond me, however, the fact that Intel, Samsung (OTC:SSNLF) and Taiwan Semiconductor spend large amounts of money to support ASML in the development is a very positive signal for me as an investor. Apparently, there is strong demand for the new EUV machines.

As a result of strong innovation and product development, ASML operates sort of as an monopoly player. According to this article by Seeking Alpha contributor Confero: "ASML is nearly a monopoly company in the semiconductor lithography market with 74% of the market share." ASML's monopoly is yet to become even stronger, because the company reported a breakthrough in the development of its new EUV lithography machines at an IBM site this week. ASML is the only player in the world to develop this new technology, giving the company an even larger competitive advantage.

Software and services

Further, ASML earns revenue from software and services (also referred to as non-system sales) next to selling lithography machines and equipment. Software and services include maintenance and operations support, application programs and products and training solutions, provided by "highly knowledgeable" professionals. The maintenance and support division offers long-term service contracts to ASML customers next to on call service support and relocation support. Revenue from service contracts and other services is likely to increase if ASML delivers more new systems.

The application programs and products division is one of the most promising divisions in terms of growth potential. ASML sells systems with a minimum capacity guarantee. However, with the correct application programs and settings, the systems minimum production capacity can be stretched. ASML offers the application programs and settings as an additional service, so the company earns additional revenue. Given the intense competition within the semiconductor industry, I expect many customers will be interested in expanding their production capacity through better applications and settings.

Non-system sales revenue increased almost 58% to EUR 767 million (USD 1,027 million) during the first half year of this year (see this report). Software will be an important stream of revenue in the future, as new software updates can stretch production and extent the technological life of both existing and new EUV machines and equipment. I believe customers will be very interested in the software updates because it will increase production without buying a completely new machine. Therefore, it is likely that ASML will be able to grow revenue from software and services in the future.

Potential headwinds

The stock price of ASML is very sensitive for all news regarding new EUV technology. For example, ASML's stock price surged 15% after a small success with EUV technology at an IBM site last week. As this new technology is key for the company's competitive advantage, delay or failure of the technology could be a big setback for the company, because ASML could loose its innovative edge over its competitors.

Further, ASML depends heavily on the amount of capital its large-cap customers are willing to spend on new systems. For now, it seems that these customers are more than willing to spend large amounts of money for ASML's products. However, the market may not be as competitive in the future as it is today. This could lower capital expenditures and investments in the industry and demand for ASML's products could decline as well.


Despite the potential headwinds I mentioned above, ASML has nearly a monopoly in the market for lithography machines and a true monopoly in the market for EUV machines. This will keep prices high and margins strong in the future. Further, ASML has a very close relationship with its major customers. Considering that the major customers spend a lot of money to support ASML in developing the EUV machines, interest and demand for the new products seems to be high. Finally, ASML will most likely be able to grow revenue from its software and services business as it installs more systems in the upcoming years. Overall, I believe ASML could be an attractive long-term investment based on the fundamentals mentioned above and most definitely worth further analyses.

Disclosure: The author is long ASML. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.