ASML Holding ASML will report its third quarter results on October 16. Here's what we think about ASML stock.

Key Morningstar metrics for ASML Holding

Date of publication of results

What to watch for in ASML Holding's Q3 results

• The threshold of orders that ASML must fulfill to reach the midpoint of its 2025 guidance is not too high. In the last quarter, orders amounted to 5.6 billion euros. As long as they stay in the €4 billion range this quarter and next, the midpoint should be achievable. For 2025 we currently have sales of 36.7 billion euros, compared to the forecast of 30 to 40 billion euros.
• In China, a normalization of the order situation and sales is expected, but it is not yet possible to say exactly when this will occur.
• Investors and analysts will also be looking to get more answers on how Intel's INTC issues may impact ASML. Intel is likely the company's third-largest customer and recently postponed the opening of a factory in Germany that is EUV-intensive. In the long term, we're not too worried. If Intel has more problems and postpones or cancels fabs, someone else would eventually seize this opportunity.
• Overall, the long-term picture remains positive and we think stocks offer a good buying opportunity.

Fair value estimate for ASML Holding

We raised our fair value estimate for ASML to $990 per share on June 5 as we increased our long-term revenue and EBIT forecasts. While our 2025 estimates remain unchanged, we have increased our long-term revenue forecasts due to greater confidence in the company's long-term prospects and greater certainty about the adoption of high NA EUV. Our fair value corresponds to a P/E ratio in 2025 of 31.5.

Demand for ASML's EUV and DUV devices remains strong as logic and memory factories have announced new expansion projects through 2030. We expect the company to hit the high end of its long-term guidance, as its previous targets were already set in 2022 for the adoption of artificial intelligence. Our fair value estimate represents a forward price-to-earnings ratio of 42 for 2024 and 32 for 2025. For the next decade, we model a compound annual revenue growth rate of 10%, with EBIT margins increasing from 31% in 2023 to 45 % increase % in our last year.

Economic Moat Rating

We attribute to ASML a broad competitive advantage supported by intangible assets, cost advantages and switching costs. The company is the world's largest supplier of photolithography machines for semiconductors, with a market share of around 90%. It has a large technological gap over rivals Nikon and Canon, with large investments in research and development that are likely to further widen ASML's moat and act as a barrier to entry.

Intangible assets are created through decades of internal know-how and long-term collaboration with companies such as Carl Zeiss and scientific research institutes. The switching costs come from software and machine maintenance, as manufacturing companies cannot afford unplanned downtime, which can cost millions of dollars.

Risk and uncertainty

We assign a high uncertainty score to ASML. Its machines account for a large portion (20-25%) of a semiconductor foundry's capital expenditure. In most industries, customers will be looking to reduce the cost of their most expensive items, so ASML must provide unique productivity and service value. It manages this risk through improvements in wafer-per-hour productivity, providing value every time it bills for a new service. As long as the company can continue to deliver these technology and productivity improvements, we believe this risk is under control, but it is under constant pressure to perform, otherwise customers will look to reduce their reliance on lithography.

Another headwind is trade tensions between the US and China. Because ASML machines contain U.S. parts, the U.S. has effective authority to restrict ASML exports to China or any other country. Since 2023, restrictions have become stricter with ASML unable to sell some of its immersion DUV machines. If export controls continue to increase, this will put long-term pressure on the company's sales.

Supply chain management is also crucial. If a key parts supplier such as Carl Zeiss were to experience a production disruption, this would create a bottleneck for ASML. In the past, the company has demonstrated good delivery management skills. The cyclical nature of the semiconductor industry adds to the uncertainty. Since ASML machines cost up to 300 million euros, customers postpone their purchases during economic slowdowns. Customer concentration is high, with Taiwan Semiconductor TSM, Samsung and Intel accounting for a large portion of sales.

Say the ASML bulls

• ASML machines last more than 30 years and provide recurring service revenue. The conversion costs and intangible assets required to replace these machines are enormous, and no competitor comes close to ASML's technology leadership
• As lithography machines become more and more complex, conversion costs and sales potential in the service area increase. ASML has the potential to improve gross margins over the next decade.
• We expect ASML to outperform the overall semiconductor market growth thanks to its strong competitive position. We expect annual sales growth in the low double digits over the next decade.

ASML bears say

• ASML sells a low volume, high price product. Lithography machines account for a high proportion of customer costs. So if the company doesn't innovate, customers will look for alternatives.
• If export controls to China continue to tighten, ASML's growth trajectory will suffer. The Company does not have effective control over this risk because it depends largely on decisions made by the U.S. government.
• The cyclical nature of the semiconductor industry contributes to ASML's risk profile. Additionally, the company relies on a limited number of suppliers for certain components, meaning any disruption leads to shortages and delays.