Geopolitical Risks Will Hamper EUV Markets While Backlogs Will Support

Key Takeaways

• Geopolitical tensions and rising technology nationalism threaten market access, intensify competition, and could undermine ASML's dominant industry position.
  
• Heightened R&D costs, overcapacity risks, and evolving chip architectures may pressure margins and weaken demand for ASML's core and service offerings.
  
• Robust demand for advanced chips, leading technology, recurring service income, and global expansion position ASML for sustained growth and earnings stability.

Catalysts

Provides lithography solutions for the development, production, marketing, sales, upgrading, and servicing of advanced semiconductor equipment systems.

• The company faces growing risks from escalating geopolitical tensions and the proliferation of trade barriers, which are causing significant uncertainty for ASML's key customers. These factors threaten to restrict access to major global markets, disrupt supply chains, and potentially limit future revenue growth.
  
• There is mounting evidence that rising technology nationalism may result in an acceleration of domestic semiconductor equipment development by major countries, creating competition and eroding ASML's dominant position and long-term revenue streams.
  
• Persistently increasing R&D requirements and costs to maintain leadership in EUV and High NA lithography are likely to put sustained pressure on net margins, particularly if customer CapEx slows or innovation cycles lengthen.
  
• The risk of overcapacity, as recent aggressive foundry expansions and wafer-fab buildouts may not be matched by demand, could lead to a drawn-out period of weaker bookings, heightened pricing pressure, and backlog declines, negatively impacting both top-line and earnings visibility over the next several years.
  
• Structural advances in chiplet architectures, 3D stacking, and alternative packaging technologies threaten to slow lithography tool replacement cycles, dampen upgrade demand for ASML's systems, and impede recurring revenues from the company's installed base and services business.

ASML Holding Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on ASML Holding compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming ASML Holding's revenue will grow by 3.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 28.3% today to 27.8% in 3 years time.
• The bearish analysts expect earnings to reach €9.4 billion (and earnings per share of €26.5) by about July 2028, up from €8.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 29.8x on those 2028 earnings, up from 28.0x today. This future PE is lower than the current PE for the GB Semiconductor industry at 53.8x.
• Analysts expect the number of shares outstanding to decline by 0.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.07%, as per the Simply Wall St company report.

ASML Holding Future Earnings Per Share Growth

Risks

• Persistent and growing demand for advanced logic and memory chips driven by artificial intelligence, high-performance computing, and ongoing digitalization is expected to sustain high utilization and orders for ASML's EUV lithography tools, leading to potential revenue and earnings growth over the long term.
  
• ASML's leadership position and technological moat in EUV and the introduction of High-NA EUV tools enable the company to command higher average selling prices and maintain or improve gross margins, positively impacting profitability and net income in coming years.
  
• The installed base management segment continues to grow robustly alongside recurring, high-margin service and upgrade revenues, underpinning stable long-term cashflows and potentially increasing overall earnings stability regardless of near-term cycles.
  
• The company's multi-year customer backlog, strong momentum in both logic and memory segments, and new fab investments globally (including in China) provide visibility into future revenue streams and mitigate risks associated with short-term order volatility.
  
• ASML's own long-range outlook, supported by secular semiconductor trends and customer roadmaps, forecasts revenue between €44 billion and €60 billion and gross margins up to 60 percent by 2030, suggesting upside potential for long-term investors and the possibility of upward share price pressure.

Valuation

• The assumed bearish price target for ASML Holding is €577.32, which represents two standard deviations below the consensus price target of €768.7. This valuation is based on what can be assumed as the expectations of ASML Holding's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €970.0, and the most bearish reporting a price target of just €500.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €33.9 billion, earnings will come to €9.4 billion, and it would be trading on a PE ratio of 29.8x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of €625.8, the bearish analyst price target of €577.32 is 8.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.