Brian Feroldi 对 $ASML 的判断变化

I know a lot on the industry but not on the specifics for ASML and TSMC. Two vitally important input makers to the semiconductor chain.

And this week's match up winner was ASML versus TSMC. But we're going to take both these companies through the simplifier seven framework and we're going to ask ourselves which of these two stocks is the better buy today.

So let us know in the chat. Are we talking to shareholders? Do you own either, both, neither, on your watch list? Let us know your interest level in these stocks.

Where is your sense for What do you think is the difficulty level of these companies? This is interesting because they have This is I don't know. I'm I'm going to say I don't know for a change. I'm going to say generally speaking I would rate these companies somewhere between medium and hard. The the technology, like what they do is quite hard to understand, but the the business models and stuff like that is on the easier side. I wouldn't put these out of the range of the average investor.

These companies I don't think necessarily belong in your too hard pile. All right, ASML. So what do we got here? This is a company that was founded 1984. It's got a market cap of about 700 billion dollars. It's in the semiconductor equipment category. Ooh, it pays a dividend. Stock Simplifier says the difficulty rating here is hard. 44,000 employees and it's tagged as both a hardware equipment maker and a toll booth business.

If you look over the last 10 years market smasher. Look at that, a 15 bagger over the last 10 years smashing past the S&P 500. Mission: Together with our partners, we provide leading patterning solutions that drive the advancements of microchips. I would say that that's highly accurate. Not much of a mission but it's it's accurate. It looks like an engineer wrote it.

Profitability, this is a company with gross margins of about 50%, operating margins 37%, net margin 30%, free cash flow margin of 37%. So, this is a company that does a great job of converting revenue into profit. Uh 13 billion in cash, 3 billion in debt, plenty of interest coverage. So, looks like a financial powerhouse.

Growth, 3 years, 5 years, and 10 years, looks like a mid-teens grower on the revenue line, slightly higher than that on the earnings and free cash flow line, and then valuation, 20 times sales, 67 times earnings, 55 times free cash flow with Oh, look at this, it's got a dividend of about 0.7%, but it's also buying back stock. So, total shareholder yield of about 2 and 1/2%. Pretty good Pretty good overall looks.

ASML builds the machines that print circuit patterns onto silicon wafers. Its lithography systems come in two families, extreme ultraviolet EUV machines sold as the NXE generation, and the newer high NA EXE generation, and deep ultraviolet machines. It also sells metrology metrology and inspect systems that measure and check the pattern those tools create.

Money arrives in two streams the company reports separately. New and used systems go to chip makers building memory and logic capacity, and each machine has a long working life once installed. That installed base feeds a second stream ASML calls install base management, service contracts, spare parts, and field upgrades that raise the throughput or capacity of machines already sitting in customer fabs. The company runs one reportable segment describing itself as a single patterning business rather than a set of divisions.

So, that's very interesting to me cuz cuz honestly to me, Justin, selling one big machine one time isn't that exciting of a business, but maintaining, installing, upgrading a fleet of machines, that's a far more interesting business.

Especially when you're the maybe the only one in the world that builds these machines. Right. Yeah, I I I'm pretty sure they're they're a monopoly on the Okay, so new system net system sales are 75% of revenue. Net service and field operations are 25%. So, pretty good revenue mix. I would like that to be flipped personally, but hey, they're still doing they're they're doing fine overall.

Look at the geographic expansion. China, Taiwan, South Korea, US, Japan. So, this is a global very well diversified global business, 33 billion in euros is the is the um uh currency.

Who's buying these things? The buyers are semiconductor manufacturers, the companies uh that fabricate the memory and logic chips inside phones, servers, and cars. Two groups matter. The larger building leading edge capacity and needs newer padding equipment, and the second runs mature node and specialty fabs on older light sources. Every fab that already owns an ASML machine is also a service customer for as long as that machine keeps running.

I'm guessing their customer retention rate is effectively 100%. I would assume so, yes. As long as the other customer as long as the customer is still in business, they'll be a customer of ASML. At the leading edge, the choice is narrow. ASML's own filings names Canon and Nikon as competitors for its deep ultraviolet systems and names no competitor at all for extreme ultraviolet, the technology the company describes as essential for advancing Moore's law. Buyers at no older nodes do weight those two rivals. For the service relationship, the reason the to buy a simpler upgrades raises the throughput of capacity of the machine in the fabs they already own. So, it seems at the extreme high end effectively a monopoly. Right below that, there is some competition. So, there they have to be a little bit more, let's just say price sensitive.

Question number one, how predictable is revenue? Modestly. Systems are capital equipment that fab that fabs replace over many years, but service and upgrades in the installed base run about a quarter of sales and grow on its own.

Yeah, that makes sense to me. It's like I I'm sure the lead times for these things is years. Um but buying a brand new machine is not something you're doing constantly. So, revenue modestly predictable makes sense.

Can it raise prices? Easily. No competitor is named for extreme ultraviolet anywhere and gross margins went rose from 53 to 54% between just this quarter. So, yeah, mission critical, definitely has pricing power.

Is it recession proof? Weak. Chip makers buy these machines out of capital budgets tied to one cyclical in market. No history through recession years on record to show the demand holds.

Competitor position dominant. ASML is the only name source of extreme ultraviolet lithography and as you try to invest in capital has stayed close to 40% for 5 years. How exciting is this business? Um, I would normally say five out of I'm going to go five out of five actually. It's how many how many like true monopolies are are out there? Very very few.

Next question. Uh, what phase of the business growth cycle is this company in? ASML is in phase four, the capital return phase. Revenue is growing, it's profitable and actively returning capital through buybacks and dividends.

Yeah. So, look at that. Revenue is growing, profits are are are growing. Um, is it buying back stock and it's paying a dividend. This one's pretty darn simple, Justin. Yep. Capital return.

Next, moat. All right. Moat size. So, what's the current state? Two protections sit at full strength. Stunk machines inside the customer fabs and proprietary technology that no rivals can match. Give ASML a wide moat. So, they got an embedded install base. Their technology with no rival and they have the returns on capital to prove it. So, five out of five moat moat.

Source. Um, current size. Moat direction. A new generation is shipping and embedded machines keeps growing. So, the moat is widening rather than simply holding. So, the new generation of next models is shipping. High NA extreme ultraviolet began reaching customers in 2025. The base is still compounding. So, the more machines they have in service, the bigger the service revenue gets. And the returns held on through the 2024 trough and dip. So, wide moat that's getting widener. Do you agree with that? Yeah, for the I think the on the moat itself, absolutely.

Yeah, switching costs, no doubt. I mean, these are like enormous machines, right? Once you get one installed, you ain't switching. And then on the IP, again, they're they're the market leader. So, I'll go ahead and agree with the AI here, wide and widening, for sure.

All right. Growth. Does this company have growth potential? So, ASML's revenue has compounded at 15% a year over the last 3 years, and management raised its guidance uh against to 43 billion to 45 billion against a 43 billion dollar base. Wow, so growth's going to accelerate. The 3-year revenue pace compounded at 15%, country above the 15% it needs. Guidance uh implying growth ahead, and forward estimates, analyst estimates for next year do not line up with what they're reporting revenue should at the company's own growth rate is what the surrender.

Okay. So, again, look at this, very very very consistent revenue growth, right? Mid-teens for for 10 years, no matter how you kind of slice it. Um and even, you know, this year, this is this is last 12 months versus annual, which is why it looks like it's a slowdown. So, it's not a it's not a one-to-one comparison uh there, but extremely predictable revenue growth.

And then just think about the end markets. Are chips getting more important or less important? Uh new offerings drive growth, for sure. How would you rate this, Justin?

Oh, I would definitely rate it as high, especially since when you look at the 10-year compared to the 5-year, it's accelerating. And I don't see AI slowing down. I see it speeding up, so from what I hear, they're selling them as fast as they can make them. I would put it high.

Uh I'll go ahead and say I'll go four. I'll be a little more cautious than you because uh totally agree that the demand the demand is there. How how can they really increase production to meet that demand and drive To me, high is like 20% growth or more. Like this to me is durable 15% ish revenue compounder. Um, but splitting hairs there.

I like the nuance though cuz it's uh I think for anyone really reviewing a company, when I see it, the demand is so high, the growth is going to be high especially with the monopoly. But when you're adding in the supply factor, how much could they actually grow? Putting it down to a four instead of a five just from a thought process perspective, that's good information that as investors we should be uh we should talk about, you know, what goes into that.

A really simple thing is the company selling atoms or bits. It's selling atoms. Atoms don't scale as fast as bits do, right? And that goes that goes both ways. Yes. Um, much harder to disrupt atoms than it is to disrupt bits.

Uh, management, okay. Five out of five. This is saying fantastic management. Management has beat estimates in seven of the eight last eight quarters, held return of invested capital near 40%, and shrank the share count while paying a dividend.

Christophe uh Fouquet Fouquet became the CEO in 2024 after leading the EUV business from 2018 and serving as a chief business officer, a planned handover. So, he's a homegrown uh CEO. He's been at the company eight years, CEO for two. Man, am I glad we tell you that information cuz that's good to know. He only has $8 million dollars at least direct stock, but if he was tired 2 years ago, Justin, he probably got a big stock package that is still vesting. So, this number will obviously grow.

Okay? Um and before that, he was at ASM and Phillips. There's no founder. Yeah. Yeah, I remember doing the research on this one specifically. The founder was actually a conglomerate between two businesses, and that's why we don't have a founder in this specific uh business.

So, this company was created for two other businesses? That's fascinating. Yes. Or or originally, so it's uh what we do in Stock Simplifier is the founder is there when it's a person, but when it's a conglomerate, we just let it focus on the CEO.

Uh do employees like working here? A- ASML gets 4.0 out of five across thousands of review sites. Do they beat expectations? Yes, they do. You know how much that matters to me personally.

Uh are they shareholder friendly? Uh buying back stock and paying a dividend and great returns on capital. Uh if we go to their execution scorecard, I care more about revenue personally than they do earnings. So, beat beat beat beat beat miss. They had one revenue miss. And the funny thing about I'm sure like a revenue miss is literally like a machine. It's like did they do one machine more or less than they were um s- supposed to.

Did one widget cause a delay where they weren't able to sold it? Yeah. Yeah, overall, checking all the boxes, basically. I'll I'll go five out of five. It seems like it seems like great leadership.

Risk. Okay, here we go. This is saying extremely risky. Wow, let's see why they're s- why it's saying that. A single customer is a quarter of sales. Government export licenses gate what ASML may ship and a strong balance sheet does not remove either exposure. So, concentrated customer base, the largest customer is 24% of revenue. I'm guessing Taiwan semi. I'm guessing.

And four customers made up 62% of revenue. One is a fab operator changing plans moves the whole top line. Yep. Uh license ASML cannot control shipping those needs Dutch and US exports license and the company says plainly it does not control the process.

So, growth is a geopolitical thing. Um its balance sheet is amazing kind of me on that. Okay, so very concentrated revenue. Does that give you pause at a company of that this size and scale?

It does to a certain extent and actually we just had a few questions come in uh in the chat that specifically focus on the risk both talking about the exact same thing. And I was waiting to chat about this in the risk as well because I think that because it is effectively a monopoly in a couple different areas their biggest strength is also their biggest weakness because if someone else is able to join this arena and actually do something that is competitive. And they actually have the supply, the demand is there. People are just waiting for the the hardware. So, I think it's really one of those double-edged swords where it the growth and everything is so strong, but the risk is actually really high because it takes one person, one competitor to all of a sudden potentially take some customers away or make it less predictable in the future.

So this is interesting so countries the filing names architecture that leans less on lithography and state-backed new entrants as the real threats. So we haven't seen that yet but it's

The company calls high NA essential to advancing Moore's Law and four machines probably probably in the deep dive. Uh top handful could disruption specific threats. Uh yep state-backed the competition factor points towards new competitors Jim by the ambition if self-sufficiency and geopolitical context actors whose funding does not depend on a technology being commercially viable first.

So absolutely like how much of a risk do you think that is? So on the one hand if China is pushing their companies to hey make this is a critical technology become a competitor to this. You know a downside to customer concentration. Well let's talk about the good and the bad of it. On the plus side you need a very small sales team to sell to 15 customers right? Like you can have a sales rep per account essentially. So sales and marketing is not a big expense. On the flip side if a competitor comes in same thing. They don't need a huge sales team to go out and start to compete against these these thing these a company like this and if you lose just one account for one reason that seriously dents your growth. So yeah I would say that that is definitely a big risk to keep in mind.

Uh how much is outside of their control? Export licenses so licensing is a big thing. Yeah, just geopolitical is is a big thing there.

And then offsetting that are the financials and the awesomeness of the of the financials. So, concentrated customer base, rising risk of of China, geopolitical headwinds. I'm curious how you, Justin, would rank the riskiness of this company. Stock simplifier says, five out of five at one out of five, as risky as it gets.

>> Yeah, I would actually put it as moderate for myself. Okay. Just because the demand is so high and primarily speaking, the competitive or the biggest risk would be a China-backed competitor. >> And there is more demand than there is supply. So, even if you added a competitor, I don't know if you would be taking away actual customers because I think that the pie is actually increasing in size. That's why I would put it as a moderate risk where I think sentiment as soon as if a competitor came out tomorrow, sentiment would get scared, other investors might get scared, but the reality of it over the long term, I would be I doubt I would be worried at all.

>> So, you're 100% right about the sentiment. How long would that take to the actually flow through and hit the company's financial statements? Probably a couple of years. Yeah, I don't like the >> I actually really like what this person said where in 3 years, it could actually do something. These machines are so large even if you put all of China's the the government backing behind it, how many years would it actually take to build a viable competitor? And then once you build a viable competitor, how long would it take to take away a customer and the time frame just keeps on extending into the future.

>> Mhm. Pedro brings up the Terafab, which is Tesla's new Terafab facility. So, one reason why that was not in Stock Screener is because this pulls from SEC filings and it's probably not in the SEC filing. So, Pedro, I think you're on the right hunt that that is a potential competitor a couple years down the down the road,

at the very least ASML has not put that in its regulatory filings as of yet. you know, if you were to say, "Hey, this is a monopoly. This is a monopoly at the high end and and it's been extremely successful." My natural inclination would be to say, "This is a very low-risk investment." Right?

>> But after reading through the disruption risk, the geopolitical risk and stuff like that, I don't think it's high risk. I I think moderate makes sense to me as a good as a good middle ground. It's more of going in, there are some things that could threaten the sentiment that could later threaten the financial statements, but as long as you know them going in there, that's what that's to me what really matters. >> I think we're 3 to 5 years away from any type of real risk for that.

>> All right. So, clearly a great business. What about the valuation? So, one out of five, it's very expensive. Reads as a steeply valued PE of 54, well above its historic range, lands it in the red zone, reinforced by a dividend yield also in the red. So, phase four companies business growth cycle naturally picks the price-to-earnings ratio first, which is when when it's when it's useful, this is the metric the best metric to kind of look at. So, you can see that back in 2025 it traded as low as 25 times earnings, currently 55 times earnings. If you look over a 3-year period, 55 Yeah, look at that. Like the stock is just like doubled um on a on a valuation basis. Over a 10-year period, very similar thing.

So, if if this was {quote} averagely priced over its 5-year average, it'd be about 1,200 bucks per share. The current price is 1,700 bucks per share if it did that. Now, that's PE. It's always good to check multiples. So, on a price-to-free cash flow basis, definitely in the expensive zone. If we look on dividend yield, so this inverted where higher lower is Excuse me, higher is cheaper, lower is better. So, the average yield here is about .8%. It's currently about 5%. Even if we go to price-to-sales, this company got as low as seven times sales, currently 16 times sales.

Um to me, Justin, multiple analysis is really all we need for for a company at this stage. We could do a reverse DCF or a DCF even, but seems give given how clean this numbers for this company's financials are, um I'm I'm I'm willing to make a valuation call. Are you?

>> Well, valuation is more your zone than mine. I I'm just looking at this chart and I'm remembering actually speaking with a community member last year, last summer specifically, looking at ASML and saying, "Wow, I just don't understand why this isn't higher." And it would have been such a great time to buy then.

>> What if we did do a reverse DCF? Let's let's I guess we can do a reverse a DCF here. So, we'll do a 10% discount rate. We'll do a 2% long-term growth rate. We'll do a 10 years a single a single growth rate. The current margin is 28% free cash flow. Yeah, I think it probably get to like 30. Um this is saying it has to grow revenue 24%. 24? Yeah, okay, I guess so. 24% revenue growth over the next 10 years holding margin free cash flow margin at 30% and that's right about I guess it got as high as 36. So, we maybe can go a little more aggressive with this and say 33 split the difference there. So, this is a company that has to grow its revenue above 20% per year for 10 years at today's prices in order for today's valuation to make sense generating 90 billion in free cash flow 10 years from now up from 14 billion today. To me, given the multiples and given that I'd have a hard time calling this anything cheaper than expensive personally.

>> Yeah, I would I would agree. Although, after what you just did with the reverse DCF it I feel like those those numbers are actually going to be quite easy for them to continue to beat. >> Easy, given the risks? Given the 10-year risk we just mentioned?

>> Yes, just for the simple fact that I would say while I look at the Achilles' heel, you know, like I said the double-edged sword, I don't see real competitive risk for 3 to 5 years.

>> So, when you stretch it out 10 years, I still see it growing without competition for 3 to 5 years and even when you get competition, are people going to want to jump at the first one being offered? That I see it okay, now it's going to be year 7 to 10 before you're risking actual customers leaving with the expansion of the industry.

>> Well, either way, I think we both agree this is a capital return company, awesome business, wide moat, what moat's getting wider, the growth is quite solid, fantastic management team, moderate risk level. You could argue either way on that. No To me, there's no doubt. This is a This is an expensive stock with a lot priced a lot priced into it. But overall, just a really fabulous fabulous business. I'm just going to naturally tag that to be on my watch list. I'm going to go ahead and set a price alert. This is a company that would probably interest me about I don't know 1,400 bucks a share. Yeah. That's something that would be in to me. And I'm also going to download that one-pager. So here's like the one-pager on it that kind of like oops zoomed in too far. Summary of everything that we just talked about with all of our numbers on there. And yeah, this would be kind of like fairly valued about 1,300. You could argue it's a little a little that might be too aggressive on the on the valuation front to like think that we'll get back there. But obviously really solid really solid business overall.

Revenue growth a little bit faster than ASML.

this to me I'm going to I'm going to rate it the same way I did um ASML.

The 10 largest are 78% of revenue. Just as concentrated as ASML.

I would rate it as I think I rate it Taiwan's uh ASML is very expensive.

If you had to choose between Taiwan Semi and ASML right now, what's your choice? Oh, that is a tough one. I would say, I think over the long term, ASML might have less risk just for the geopolitical. So, ASML might be my choice, and I think that there are more people trying to put their hat in the ring for semiconductor chips than there are for the lithography. So, I think with ASML, less people are trying to compete, and even if they were, it would take so long to do. To me, trying to be risk averse, I would go with ASML over TSMC.

Uh I don't like the ASML valuation at all. Uh on second look I would probably rate it as a one out of five as opposed to two out of five.