ASML: Is the 30X PE lithography king expensive?

Through Dolphin Research's previous introduction, we can understand that the lithography machine is an important part of the advanced process in wafer manufacturing plants, and ASML plays a crucial role in the lithography market. Especially in the most advanced EUV lithography machine market, ASML enjoys a monopoly.

Although the company is excellent, when it comes to investment, one must also consider the current business situation and stock price to assess the risk-return situation. In this article, Dolphin Research will combine ASML's performance forecast to evaluate its valuation.

First, Dolphin Research breaks down$ASML(ASML.US)'s model and combines it with the company and industry situation to estimate that the company's revenue is expected to reach $40 billion by 2025, with a compound growth rate of about 20%. Correspondingly, ASML's net profit is also expected to increase to around $10 billion by 2025, with a compound growth rate exceeding 20%.

From the perspective of the company's expected performance and historical valuation, ASML's current valuation is not expensive. However, it should be noted that the company itself faces certain uncontrollable factors. Policy changes at the national and industry levels can pose potential risks to the company's performance and market expectations.

Therefore, Dolphin Research believes that investment in ASML should still be approached from a relatively conservative perspective, which will provide a greater safety margin. ASML itself has a monopoly position in the lithography market (with a 50% gross margin), and the compound growth rate for 2024-2025 is expected to reach around 15%. Assuming a relatively conservative PE ratio of 25 for the company (in 2025), the expected profit in 2025 is around $10 billion. Taking into account the discounting situation, the corresponding market value is around $206.6 billion (equivalent to $520 per share).

If the company's stock price continues to decline to the conservative valuation range, the investment value of ASML will be more prominent.

The following is Dolphin Research's specific analysis of ASML:

When considering the investment value of ASML, we mainly focus on performance estimation and valuation. In this article, Dolphin Research first conducts performance estimation for the company.

Performance Estimation for ASML

Performance estimation mainly starts from the aspects of revenue, gross margin, and operating expense ratio, and then estimates the company's future performance.

1.1 Revenue

From Dolphin Research's previous introduction to ASML, the company's current revenue is mainly divided into system sales revenue and service revenue, with system sales revenue accounting for nearly 80%.

Therefore, we consider two parts when calculating revenue:

1) System Sales Revenue (System): This revenue mainly refers to "selling equipment," including EUV and DUV lithography machines.

Since we know that lithography machines are mainly sold to downstream wafer manufacturers, the downstream manufacturers' equipment capital expenditure directly affects the company's revenue in this area.

Therefore, when calculating system sales revenue, Dolphin Research mainly considers: a) downstream capital expenditure on equipment; b) factors such as the mass production of the 3nm process.

According to SEMI's latest forecast for wafer fab capital expenditure, global spending on 200mm and 300mm wafer equipment will decline in 2023 and stabilize and rebound from 2024 onwards.

Although global equipment spending is declining, due to the company's product leadership and increased demand from downstream customers such as those using the 3nm process, the company will still achieve positive growth this year.

Combining industry forecasts and the situation in the industry chain, Dolphin Research predicts that ASML's system sales revenue is expected to grow to over $30 billion by 2025, with a compound annual growth rate of over 20%.

2) Service Revenue (Service): This revenue mainly refers to "post-maintenance" and other software-related income. Dolphin Research believes that this is related to the start-up and manufacturing situation of wafer fabs, combined with the company's customers and wafer monthly production capacity to make predictions.

According to SEMI's latest expectations for global wafer capacity, spending on 200mm and 300mm wafer equipment will maintain relatively low to mid-single-digit growth in 2023, with the growth rate expected to rebound from 2024 onwards.

Due to the company's relatively high-quality customers, the company's revenue growth rate in this area will also outperform the industry average, as the start-up rate and wafer production performance are better than the overall market.

Combining industry forecasts and the situation in the industry chain, Dolphin Research predicts that ASML's service revenue is expected to grow to over $9 billion by 2025, with a compound annual growth rate of over 15%.

Therefore, Dolphin Research expects the company's revenue to grow to around $40 billion in 2025, with a compound annual growth rate of about 20%, based on calculations of system revenue and service revenue.

1.2 Gross Margin and Expense Ratio

1) Gross Margin: As ASML is a technology company with a monopoly position, it has maintained a high gross margin of around 50% for a long time. The recent mass production of 3nm processes by customers is expected to further drive the shipment of EUV, thereby boosting the company's gross margin. Dolphin Research assumes that the company's gross margin will remain at around 50% over the next three years.

2) Expense Ratio: ASML's expenses mainly consist of research and development expenses and sales expenses. As a technology company, ASML has relatively high research and development expenses. Based on the company's situation, Dolphin Research assumes that the research and development expense ratio and sales expense ratio will remain at around 15% and 4% respectively over the next three years.

1.3 Profit Situation

Combining the assumptions about revenue, gross margin, and expenses, Dolphin Research predicts that ASML's net profit is expected to increase to around $10 billion by 2025, with a compound annual growth rate of over 20%.

II. Valuation Considerations for ASML

First, let's look at ASML's current market value of $232.8 billion. Is this price expensive? Based on Dolphin Research's estimation of the company's performance, the PE valuation for this year is approximately around 30 times.

1) Historical Valuation Perspective:

From a historical valuation perspective, after a recent correction in the stock price, the current valuation of around 30 times does not appear to be expensive.

Dolphin Research believes that in the current semiconductor cycle, which is still relatively weak, the company's recent performance is mainly benefiting from the shipment of EUV and the improvement of DUV in the mainland China market. However, the overall semiconductor market remains relatively conservative in terms of equipment spending.

2) Future Growth Perspective:

After experiencing the mass production of 3nm and the market expansion in mainland China, Dolphin Research expects the company's compound growth to fall to around 15% from 2024 onwards. Based on Dolphin Research's estimation of the company's future performance, ASML is expected to achieve a net profit of $10 billion by 2025. Considering the historical and growth rate situation, a relatively safe valuation of 25 times PE is assumed.3) Overall Analysis:

If ASML continues to develop normally, its current market value corresponds to a valuation that is not expensive, relatively neutral. However, certain special reasons may lead to adjustments in customer and shipment situations, which should also be taken into consideration.

Currently, the mainland China region accounts for approximately 15% of ASML's revenue, mainly driven by DUV lithography system products. Due to certain uncontrollable factors, Dolphin Research believes that investment in ASML needs to be approached from a relatively conservative perspective.

Although ASML's stock price has recently fallen from its high point of $770 to below $600, it has not yet reached a significant safety margin. Considering the estimation of the company's performance, Dolphin Research believes that ASML, as a leading lithography company with a growth rate of around 15%, would be more secure with a valuation of 25 times PE.

Assuming a relatively conservative PE of 25 for the company (2025), with an expected profit of around $10 billion in 2025. After considering the discounting, the corresponding market value would be approximately $206.6 billion (equivalent to $520 per share).

If the company's market value continues to decline to the conservative value range, the investment value of ASML will be more prominent.

Dolphin Research's analysis on ASML and the semiconductor industry chain

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In-depth Analysis (Part 1) on July 14, 2023: "The 'Ultimate Belief' in ASML"

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Risk disclosure and statement for this article: Dolphin Research Disclaimer and General Disclosure