Advancements In EUV Technology Will Drive Future Demand In AI And High-Performance Computing

Key Takeaways

• ASML's focus on innovative EUV technology and rising R&D investments positions it for sustained high margins and long-term earnings growth.
  
• Anticipated demand from AI and high-performance computing sectors indicates potential revenue and margin increases, bolstering investor confidence.
  
• Evolving geopolitics, order uncertainty, and variable demand could impact ASML's sales, earnings, and revenue timing, affecting investor confidence and financial stability.

Catalysts

Develops, produces, markets, sells, and services advanced semiconductor equipment systems for chipmakers.

• The ongoing advancements in High-NA and Low-NA EUV technology, particularly the ability to run over 10,000 wafers with significant performance benefits, suggest potential future revenue growth as they enhance customers' Logic and DRAM processes.
  
• ASML's aggressive investment in R&D, increasing to €4.3 billion in 2024, demonstrates a focus on innovation and product development, which is likely to sustain high gross margins and support long-term earnings growth.
  
• The anticipation of increased demand driven by artificial intelligence and high-performance computing sectors indicates a potential for higher revenue and possibly higher gross margins if demand pushes sales toward the upper end of guidance.
  
• The company plans to progressively transition from quarterly to annual reporting on order backlogs, suggesting a strategic shift that could improve earnings visibility and investor confidence in stable long-term growth.
  
• Expected revenue growth in the Installed Base Management sales and consistent upgrade business suggests a steady stream of recurring revenue, supporting overall margins and improving net income predictability.

ASML Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ASML Holding's revenue will grow by 14.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 26.4% today to 30.5% in 3 years time.
• Analysts expect earnings to reach €12.0 billion (and earnings per share of €34.01) by about January 2028, up from €6.9 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €8.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.8x on those 2028 earnings, down from 38.8x today. This future PE is lower than the current PE for the GB Semiconductor industry at 45.8x.
• Analysts expect the number of shares outstanding to decline by 3.54% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.51%, as per the Simply Wall St company report.

ASML Holding Future Earnings Per Share Growth

Risks

• Evolving geopolitics and new export control regulations, particularly with China, may impact ASML's sales and ability to capture demand, affecting both their revenue and backlog metrics.
  
• The lumpiness and uncertainty in customer order patterns, along with ASML's decision to stop reporting quarterly bookings, could lead to potential misalignment with market expectations, affecting investor confidence and perceptions of business momentum, thereby impacting earnings forecasts.
  
• There is a risk of customers pushing out their capacity plans or altering EUV tool insertion timelines, particularly for High-NA systems, which could affect ASML's revenue and cash flow projections.
  
• Economic and sector-specific dynamics, such as fluctuations in demand for AI, memory products, and mobile devices, could lead to variable demand for lithography equipment, impacting revenue stability and net earnings.
  
• Any delays in customers building cleanroom space or rolling out capacity to support significant nodes like 2-nanometer processes, or shifts in technology adoption timelines, could affect the timing of revenue recognition and margin realization.

Valuation

• The analysts have a consensus price target of €839.12 for ASML Holding based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €1057.0, and the most bearish reporting a price target of just €500.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €39.4 billion, earnings will come to €12.0 billion, and it would be trading on a PE ratio of 29.8x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of €682.5, the analyst's price target of €839.12 is 18.7% higher.
  
• 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.