Castlefield Stock Story - ASML

By James Buckley

In this Castlefield stock feature, European fund manager James Buckley introduces ASML - the innovative leader driving the semiconductor and microchip industry.

ASML, the semiconductor equipment manufacturer, describe themselves as “The most important technology company you’ve never heard of”, reflecting their relatively low profile as an IT hardware supplier, rather than a consumer-facing tech company like Apple or Facebook.

Nevertheless, ASML is a phenomenal growth story playing to established technological themes like digitalisation, 5G and cyber security, whilst emerging themes such as vehicle electrification and artificial intelligence add a further leg to this growth.

ASML designs and manufactures the equipment necessary for the production of next-generation semiconductors and processors.

ASML’s ultra high powered lithography machines essentially allow chip manufacturers to “print” the outline of their semiconductor designs onto silicon wafers, which then form the basis of microchips. This requires extremely powerful “Extreme Ultra Violet” (EUV) or “Deep Ultra Violet” (DUV) machines.

These “lithography” machines as they are known, are highly sophisticated yet reliable pieces of equipment that need to be able to deal with the ever-shrinking designs of chips, whilst still being able to cope with the high production volumes demanded by chip-manufacturers.

As such, the latest, most sophisticated models sell for $200m-$300m each. Astonishingly, ASML's machines are so reliable that their older machines are often still in use, put to work producing less sophisticated chipsets, so the company estimates that 95% of all the lithography machines they have ever sold are still in use.

As all the major chip suppliers use ASML’s lithography machines in their manufacturing process, ASML enjoys a dominant position in the production of EUV lithography machines.

Chip shrinkage is essential to meet growing technological demands, including Generative Artificial Intelligence and is a key manifestation of Moore’s Law. This was first described by Gordon Moore (co-founder of Intel, who happen to be a key customer of ASML) and describes the relationship where computing power dramatically increases as chips shrink when more transistors can be placed onto a single chip. This also has the effect of dramatically reducing the cost of computing power to end users.

ASML’s share price performance has been very strong over the past five years as investors have woken up to its crucial positioning in the technological supply chain. This is highlighted by looking at its three-year financial performance, where earnings per share more than doubled from €6.16 in 2019 to €14.13 in 2022, on sales which grew from €11.8bn to €21.2bn.

ASML’s machines also play a vital role in improving sustainability, as companies and governments strive to achieve ambitious Net Zero targets by leveraging technology further.

Responsible sourcing of minerals is a key consideration for the company and it publishes a high level of detail in its annual Conflict Minerals Report.

ASML works with suppliers to trace materials back to the smelter of origin from, and cross-references against, the Responsible Minerals Initiative list of conflict-free smelters and refiners.

We have taken advantage of some recent share price weakness to add a position in ASML to the CFP Castlefield Sustainable European fund.

Written by James Buckley

 

Information is accurate as at 10.10.2023. Opinions constitute the fund manager’s judgement as of this date and are subject to change without warning. The officers, employees and agents of CIP may have positions in any securities mentioned herein. This material may not be distributed, published or reproduced in whole or in part. With investment, capital is at risk.