ASML Holding (NASDAQ: ASML), the dominant company in ultraviolet lithography equipment used in manufacturing semiconductors, has endured numerous shocks in recent years. The pandemic has caused long-lasting ripples in global supply and demand for chips, affecting ASML customers' orders for lithography equipment. ASML also ran up against supply constraints of its own, and has been building more capacity to crank out more machines to chip manufacturing customers.
The biggest risk of all, though, has been geopolitical in nature -- a symptom of the U.S.-China battle for computing power supremacy that became apparent during the "trade war" that started in 2018. The U.S. and Netherlands (where ASML is based) have imposed bans on the sale of ASML's most advanced lithography equipment, EUV (extreme ultraviolet), since 2019. New restrictions on its also very advanced but previous-gen DUV (deep ultraviolet) machines are also going into effect in 2024.
The geopolitical intrigue isn't abating, and ASML stock has fallen more than 20% since July 2023. So, is ASML a "buy the dip" candidate?
China shows off new tech thought to be impractical
To continue the advance of semiconductor power -- and thus computational power -- the chipmaking industry has been adopting ASML's EUV technology. To date, only ASML has produced a machine capable of this, and they cost upwards of 200 million euros each. It's a steep price tag, but one the industry is willing to eat given that crafting chips with features just a few nanometers in dimension is even costlier using DUV machines.
This monopoly like position and computing technology reliance on ever-more-powerful chips have led many investors to bet on ASML's long-term advance. After all, ASML expects to sell lots more lithography machines for increasingly high price tags over the course of the next decade.
That isn't to say crafting very advanced chips without EUV is impossible. Though barred from EUV, China's tech giant Huawei -- which has landed on the U.S. government's list of organizations that pose a national security risk multiple times over the last five years -- recently unveiled the Mate 60 Pro smartphone. A very capable processor lies inside with N7 (referring to how many nanometers in dimension features on the chip measure) manufacturing tech.
Outside of China, manufacturers like Taiwan Semiconductor Manufacturing Company and Intel have adopted some EUV (in tandem with DUV) to craft N7 and more advanced chips. The Huawei chip, thought to be impossible, seems to have been made anyway without EUV.
Details are scant, especially from Huawei, but industry engineers think the chip powering the Mate 60 Pro uses multi-patterning techniques using only DUV. It's a breakthrough for China if true, and could possibly mean the U.S. may want to apply more restrictions to DUV machines ASML can sell to China.
How reliant is ASML on DUV?
Suffice it to say more restrictions on ASML could damage an investment thesis in the company. In fact, on Sept. 1, the Dutch government announced restrictions on the sale of ASML's most advanced DUV equipment (called immersion DUV lithography) that will go into effect on Jan. 1, 2024.
Older DUV equipment is still for sale to China, and Chinese chipmaking customers are gobbling up these machines. Due to pull-forward of some DUV sales from 2024 into the back half of 2023, ASML management bumped up its expected revenue growth rate this year from about 25% up to 30%.
But new DUV restrictions could put a damper on ASML. Of the 4.5 billion euros in customer bookings for lithography equipment in Q2 2023, only 1.6 billion euros was for the most advanced EUV machines. That means some two-thirds of ASML's future revenue is still going to be tied to DUV, as well as services related to those machines. And China accounts for about 20% of ASML's overall revenue, all of which is tied to DUV. So more geopolitical bumps in the road would most certainly throttle the company's growth.
Even after falling from recent highs, ASML stock trades for a premium 30 times trailing-12-month earnings per share, and 25 times analysts' expectations for 2024 earnings. I still think ASML is a top semiconductor stock to buy for the very long term, owing to chip manufacturing making a slow but steady transition to EUV, plus lots of DUV sales to China and everywhere else too. But expect plenty more bumps in the road as the market tries to get a handle on how U.S.-China relations could further impact ASML's business.
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Nicholas Rossolillo has positions in ASML. The Motley Fool has positions in and recommends ASML and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: long January 2023 $57.50 calls on Intel and long January 2025 $45 calls on Intel. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.