ASML: Cycle Up

ASML, the Dutch firm behind the production of lithography equipment essential for semiconductor manufacturing, released their 2023 full year financial results last week. In the semiconductor production process, lithography employs light to intricately design patterns on silicon. Semiconductors serve as foundational components (basically the brain) in all electronic devices: ranging from everyday appliances to the smartphones, and the high-powered Graphic Processing Units (GPUs) crucial for training and operating Large Language Models (LLMs) like ChatGPT.

Semiconductors vary widely in transistor count, with some containing tens of billions of transistors. The smaller the transistor, the greater the number that can be accommodated on a semiconductor, resulting in enhanced performance and energy efficiency. ASML’s cutting-edge lithography machines can create patterns with transistor sizes as small as 3nm (nano meters, i.e. one thousandth millionth of a meter), and they are currently building the capacity for their 2nm technology. Some argue that the technology they have developed is the most intricate ever devised by humankind.

ASML reported €27.6 billion in revenue for the past year, marking a 30% increase compared to the previous year. The net profit for the company increased 39%, reaching €7.8 billion for FY2023. ASML noted that the current fiscal year will yield results similar to FY2023, emphasizing the ongoing recovery of the semiconductor industry from the trough of its economic cycle. ASML’s primary clientele comprises major fabrication plants in the semiconductor sector, including TSMC, Samsung, and Intel. Notably, ASML’s clients have given them indications that they want to increase capacity for 2025. This is evidenced by a significant growth in their order book.

ASML holds a virtual global monopoly in the sale of lithography equipment. Due to this dominance and the fact that semiconductors play a vital role in military applications, companies dealing in such equipment require licenses to sell their products. The United States and several allied nations, including the Netherlands, have imposed trade restrictions, restricting the sale of their most equipment to China. ASML anticipates that this will result in a 10-15% decline of their sales to the Chinese market.

ASML is held in the Lunar BCI Worldwide Flexible fund. It is also held by Lunar Capital’s Offshore Portfolio clients.