Headquartered in Veldhoven, the Netherlands, ASML makes the machines that are used to manufacture electronic circuits. ASML designs, develops, integrates, markets and services lithography systems for the semiconductor industry.
ASML’s main customers are Intel, Samsung and TSMC. Apple sources its main processors from TSMC. Therefore it becomes immediately evident that ASML supplies the world’s leading technology firms.
The company manufactures photolithography imaging machines. Photolithography machines image patterns onto a silicon ‘wafer’ that is covered with a film of light-sensitive material. This material can then be processed to create the actual electronic circuit on the silicon.
ASML is currently sells machines that print features of at less than 22nonometers on silicone at 500 wafers per day. ASML are aiming at 1500 wafers per day by 2016.
ASML is also a leader in Extreme Ultraviolet Lithography. ASML is leading the race towards ‘printing’ features below 10nanometers using EUV light. Pilot production will probably start in 2015. In the meantime, Intel has already detailed its, 10nm, 7nm and 5nm roadmap.
To accelerate the development of these next-generation lithography technologies, ASML and three of its large customers; Intel, TSMC and Samsung, concluded a customer co-investment programme in 2012.
Under the program, the three customers contributed €1.38 billion to ASML’s research and development of next-generation lithography technologies over five years. As part of the program, Intel, TSMC and Samsung acquired and now hold ASML shares equal to an aggregate 23 per cent minority stake with limited voting rights.
The agreement placed ASML in a privileged position as it guaranteed investment resources. On the other hand clients are able to be first in the market with new products.
ASML’s financial performance depends heavily on the sale and servicing of a ‘few’ machines worldwide.
Therefore, the sale of a new machine results in a significant increase in the top line figures and vice versa. This is evidenced by the volatile nature of ASML’s price movement. However, long-term investor willing to ride though the volatility associated with the sector are likely to be rewarded.
Going forward, we expect margins in 2015 to remain tight due to an increase in orders for lower margin machines. These margins are expected to improve in 2016. In 2015 anything above the 45 per cent guidance will provide out-performance.
The company has announced that it intends to triple earnings per share by 2020. This target implies that ASML shareholders may see price growth gains in line with this target. We are confident is the company’s ability to meet its objectives.
ASML sales depend on the global demand for memory chips. Weakness in this sector may impact ASML negatively. Intel and TSMC, two of ASML’s top clients will be reducing investment in CAPEX which indicates that the sector may come under some pressure. However, ASML’s market leadership is proving to be a good defence against shifts in end product demand as these companies are committed to finance ASML’s research.
Investors should be aware that a strong dip in semiconductor demand may impact the outlook for ASML. However, with the advent of the Internet of Things, that is, digital integration between everyday objects, we believe that the demand for ASML products will remain robust.
ASML is also on the verge of mass commercializing 10nm tools, and is targeting 7nm and 5nm tools. Each upgrade will produce small and faster electronics. These tools will permit Intel to produce the next generation Core processor, Samsung to produce faster RAM and Apple to upgrade its iPhones.
Disclaimer: This article was issued by Antoine Briffa, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.