ASML holds a monopoly position with strong demand and backlog, but faces risks from semiconductor capex cycles and China export restrictions.

The first stock I will talk about today is ASML. This is not a name known to the general public. This is a Netherlands-based company that spun out of Philips in 1984.

What does ASML do? They make the machines used to manufacture the most advanced computer chips in the world. These are extreme ultraviolet lithography systems, also known as EUV systems.

It uses a wavelength of light that is extremely difficult to produce to etch circuit patterns onto silicon chips that are small enough for high-end chips. Therefore, building just one of these systems requires bombarding droplets of molten tin with a laser about 50,000 times per second, then reflecting that light through mirrors designed with extreme precision so that the largest defect in them is still smaller than a millimeter.

No other company on Earth manufactures a commercially viable EUV machine other than ASML. Companies like Nikon and Canon have tried to imitate it but have failed.

One of its next-generation machines costs more than 350 million euros per machine. They are shipped in approximately 40 containers, and then assembled on-site by ASML engineers themselves.

Therefore, the company's role is essential not only in manufacturing and selling these machines, but also in assembling them on-site for their chip-manufacturing clients.

ASML makes money in two ways. The first is through sales of new systems, i.e., these large, one-time transactions, and the second is through management of the installed database.

This includes ongoing services, upgrades, and spare parts for machines already in service. This basically means that chip manufacturers operate these machines for 15 to 20 years or more, and ASML generates recurring revenue from the services it provides to help keep those machines running.

It is similar to a subscription or annual salary, and it grows automatically as the installation base expands, regardless of new machine orders in any given year.

Therefore, building AI infrastructure has pushed ASML's order book beyond its current supply capacity. The company's CEO said on the second-quarter earnings call, and I quote: "Supply will not meet demand in the foreseeable future."

And that memory customers have already booked our entire production capacity for 2026. Therefore, the company's backlog of orders reached approximately $50 billion at the beginning of this year.

The administration has already raised its guidance for the entire year twice. They are already looking to expand beyond 2027 and 2028. In the second quarter of this year, they announced total net sales of €9.3 billion and net income of around €3 billion.

They are looking to generate up to 45 billion euros in revenue in 2026 alone.

It is also worth noting that this is the fifth largest chip-related company in the world with a market value exceeding 600 billion. You know, it's a really interesting company.

Its latest generation of machines, the next-generation extreme ultraviolet (EUV) machines, are still in the early adoption phase. Most factories are still operating the previous generation, so there is a long upgrade cycle for several years to come.

It is worth noting that the revenue from the installation base alone is expected to grow by more than 30% in 2026.

So, this is a company that effectively monopolizes the market and the entire chip industry cannot function without it. Demand currently exceeds supply. It is clear that ASML is still tied to the capital expenditure cycles of semiconductors.

Historically, those cycles have been volatile. Therefore, if there is a slowdown in spending by chip manufacturers, whether related to artificial intelligence or otherwise, it will affect ASML.

China is also a real variable factor. Chinese customers peaked at 42% of sales last year before export restrictions were tightened, and those revenues are expected to decline through 2026.

However, this business is in a truly unique competitive position, as a veritable monopoly supplier. The trade-off is exposure to both the semiconductor capital spending cycle and geopolitical decisions.

Both of these things are largely outside of ASML's control.

Therefore, this ends up being very closely related to Rachel's favorite stock, ASML; Because if there is a shortage of supplies with very high demand, TSMC will purchase more products from ASML and see how much ASML can produce.