ASML is undervalued; monopoly status and strong earnings growth justify buying despite recent price increases.

ASML has been one of the biggest winners in my personal investment portfolio over the past year. I significantly increased my investment in this stock last year in 2025, and you can now see that I have made a profit of approximately 157% on this position .

It is indeed the primary driver of much of the growth in my personal portfolio recently. But what's really interesting is that despite the stock rising by more than 127% in the past year, take a closer look at this stock's valuation.

It is currently trading at a price-to-earnings ratio of 29.24, which is actually lower than its 5-year average. It is actually still below its 3-year average.

Therefore, compared to how the company has traded historically, it is trading at a discount despite having risen by more than 100% in the past year.

Now, how could something like this actually happen? Well, of course, this is only possible when earnings per share grow very rapidly. And when you look at a stock like ASML, you'll see that's exactly what happened.

Take a look at the stock analysis tool . Back in 2020, this stock was generating earnings per share of $7.91. Now the figure is approaching $25. Therefore, earnings per share have more than tripled over the past five years .

This is the type of earnings growth that allows a stock to double in value and yet still trade at a discount compared to its historical performance. Is ASML stock an interesting company at $1700 per share ?

We also need to answer the question: Does this high rating justify it ?

We certainly need to answer the question: Does China pose a threat to ASML's monopoly?

So, let's talk about ASML. As we have already seen , the reason their valuation seems interesting at current prices at first glance is that earnings have grown at a much faster rate overall over the past five years compared to the share price.

Any time a stock price has grown by about 99% over the past five years , while earnings have more than tripled, it means that the price-to-earnings ratio will look significantly more attractive , and that is exactly what has happened, at least on a forward-looking basis.

Now, the decrease in the evaluation multiple can be justified based on two things. First, are their profits expected to grow at a much slower rate in the future? Or secondly, are they losing their competitive advantage? Are they losing their economic foothold?

If you are not familiar with ASML, what is their economic moat essentially? Okay, you need to understand the artificial intelligence ecosystem. The image we are looking at here essentially draws a map of the semiconductor system and shows exactly where ASML fits.

What it does is supply manufacturing equipment that makes advanced chips possible. But the matter is actually much deeper than that. ASML actually occupies one of the most critical bottlenecks in the entire chain.

These are extreme ultraviolet (EUV) lithography systems . These systems are considered the most complex machines in the world. The most complex machines on Earth. ASML is the world’s only commercial supplier of EUV lithography systems, which are essential to the manufacture of many of the most advanced chips.

So, what does this mean? Yes, that means it's a monopoly, but it means much more than that .

But whenever I see a chart like this , the first thing that comes to mind is ASML. Not Microsoft, which is also a major holding in my investment portfolio. Not Google. It's not Meta, and it's not Amazon. It's ASML.

Why is this the case? Well, because while we can dive deep into each of these companies and analyze what their capital expenditures actually look like, the fact is that I also know that all of this capital spending ultimately flows into one company , which is ASML.

Why is this the case? Well, because they represent the bottleneck. They are the sole suppliers of extreme ultraviolet ( EUV) lithography technology. Therefore, as capital expenditure continues to increase , we see this flowing directly into ASML's bottom line.

And that's not all. If we move to the profitability sheet, yes, revenue growth continued to rise, but look at the profit margins as well . This company's profit margins continue to expand , rising from about 46% in 2015 to about 52.8%.

Now, we need to pause for a moment and ask ourselves, why is this the case? Why were they able to expand their profit margins? Well, this actually goes back to an element in their work that many people overlook when analyzing ASML.

And that's a much bigger part of their work than many people realize either. What am I talking about? I am talking about the company's field services and maintenance sector . This is a business sector that is very similar to recurring revenue.

It's more like a subscription model. We can see from 2024 to 2025 that this is the part of the business that has grown by more than 26% year-on-year.

Now, what exactly is this ? Well, this is the revenue that comes from ASML maintaining and updating its installed base of hardware. So, what does that mean? Well, basically, every time ASML sells these lithography systems, it also means that they will have to continue maintaining these systems for years to come .

So, they are not only doing the initial sale, but it seems as though they are adding a layer of subscription-based revenue to their business. As this part of the business continues to grow, it continues to boost those overall profit margins.

Therefore, they not only have a monopoly and are not only at the top of the semiconductor ecosystem , but they continue to add a growing layer of recurring revenue.

Personally, and as a side note, as an investor in dividend growth, I like recurring income. Why is this the case? Well, because recurring revenues mean more predictable cash flows, which means management is likely to increase dividends at a robust rate over time .

And that is exactly what ASML has done historically. The compound annual growth rate of dividends over five years is approximately 18% . They have significantly increased their dividend payouts over the past decade, and management has stated that they will continue to raise payouts over time.

Now, keep in mind that this is not an American stock. It's a European stock. Therefore, often, the dividend policy will look slightly different. European stocks sometimes pay semi-annual dividends, and distributions do not usually increase on an annual basis as American stocks typically do. So, this is something to keep in mind.

Now, we'll come back and talk more about the rating in a moment, but we also need to address the headlines we've seen recently. An unnamed Chinese company has begun developing an advanced chip-making machine, causing ASML's stock to plummet.

Now, if you've really been watching ASML over the past two or three years, this is a headline we've seen repeated several times now, and each time it's repeated, ASML stock sees a slight dip that day.

I'm going to confront you with some facts now. Just one day after that article was published, Bank of America described it as an overreaction. Just a few days ago, an analyst at UBS, who has been researching this topic for a long time, stated that China's DUV technology is at a similar stage to where ASML was in 2004. 2004, that was two decades ago .

And to be honest, I absolutely believe this. This is the feeling we have seen over the past two years.

ASML has been heavily reinvesting in its business. They have been pumping capital into research and development, which has given them a significant advantage over the years. This research and development not only gave them a significant advantage and allowed them to monopolize the market, but there is something else that many people seem to overlook.

On page 307 of their 2025 annual report, it looks like a collection of boring information. Something that many people might overlook. But if we look here, we can see what their annual tax situation actually looks like.

ASML's income tax expense, based on the local rate, amounted to 25.8%. So, 25.8%, but because a large part of ASML’s profits come from proprietary technologies developed through research and development, it qualifies for what is known as the Innovation Fund in the Netherlands.

In 2025, this tax incentive reduced ASML's tax expenditure by more than 1.1 billion euros . This resulted in reducing its effective tax rate to only about 18%. So, these are truly amazing tax savings.

Another huge advantage for ASML. The fact is that they have no control over this feature, but they certainly benefit from it.

But regardless of what happens in this case, they are far ahead of what we call their peers, when in fact they have no peers at all. Therefore, they are at the top of the food pyramid.

All capital spending eventually flows back to them. They are a continuous monopoly in adding a recurring level of revenue to the business.

Thus, you can see that suddenly, last year when sentiment towards the stock was extremely low, the price-to-earnings ratio dropped to around 22 times earnings. This is for a stock whose earnings are expected to grow, and have already been growing, at a very high rate. Keep that in mind.

Look at ASML. If we come here, we can see the loading of historical data. They have achieved a compound annual growth rate in earnings per share of approximately 23.3% since 2017.

So again, very significant growth since 2017. But what's exciting is that their earnings are expected to grow at an even faster rate until 2030. The projected compound annual growth rate for earnings per share is 27.5%.

So take that in for a moment when looking at this price-to-earnings ratio. The price-to-earnings ratio has fallen significantly, settling at around 30 when looking at the adjusted price-to-earnings ratio over the next 12 months .

Despite the fact that profits are expected to grow at a faster rate than they have historically.

So you can do the calculations. This makes things extremely interesting. Let's assume, then, that they are growing earnings by 27 %, or perhaps slightly less in the 25% range, and that the 12-month price-to-earnings ratio— not the forward multiple—of 53.2, drops slightly to around 40.

You can still see that the future returns for 2029, 2030, and 2031 look very attractive. Keep in mind that a price-to-earnings ratio for the previous 12 months of 40 means that the forward price-to-earnings ratio is much lower.

For your information, the current price-to-earnings ratio for the previous 12 months is 51.6, while the forward price-to-earnings ratio is only 29.2. Therefore, based on future earnings, this will remain a very low price-to-earnings ratio for the stock.

Of course , assuming they continue to increase profits at a high rate.

Now, there is some cyclical nature to the industry they work in. There is no doubt about that. But they will continue to maintain their competitive advantage. They are decades ahead of those whom some call their peers.

On top of all this, when you look at the guidance they gave us, yes, revenues and profits continue to grow, but the gross profit margin is now expected to be between 54% and 56% in 2026, which again means, for comparison, that margins continue to expand even compared to what they were in 2025.

So, you can see why this is such an attractive business model. You can see why I found it so attractive in 2025, when it was trading around $600 to $700 per share. Although I added a good amount of capital to it, the truth is that when I saw it rise to the $1400 to $1500 range, I felt it was no longer a great opportunity .

But as I continued to research this stock, delving into its earnings growth prospects and considering the company's competitive advantage, I realized that even at these prices, it's not a ridiculous valuation at all .

I can still see the logic in buying it at these prices.

We have not seen any sign of major technology companies slowing down their capital spending. In fact, it was quite the opposite. They continue to raise their expectations. So, while I continue to expect amazing swings in ASML stock, it has been extremely volatile since I started owning the stock.

I think that over the next five to ten years, people who buy at this price will probably be very glad they did . Therefore, I am seriously considering adding more ASML shares to my portfolio at this time, along with Broadcom.

But again, please let me know what you think about ASML in the comments below.