Whilst the world’s main chip manufacturers have the tiniest measuring contest in the change room, there’s a forgotten element to this equation that has little to no attention. ASML. Please note that I hold ASML in my eToro portoflio.
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ASML is the world’s only manufacturer of lithography machines that use extreme ultraviolet light or EUV lithography. I’m not going to bore you with $ and % metrics but dazzle you with buzzwords and sentences that you might understand the first time around.
A simple way of explaining this technology is imagine you have an A4 sheet of paper. On this sheet of paper, you draw the Apple logo. Easy, right? Now fold the paper in half (A5). Using the same pen, draw the same logo. Cool, easy enough. Now fold the paper in half again, keep going on folding and drawing the logo with the same pen. After a while, it’s going to get very difficult due to the size of the pen and the size of the paper. When EUV lithography is a special pen that lets you mark tiny itty bitty inputs on to even smaller chips. Doing this process in layers so produce one of the clearest pictures around.
Why is this important to ASML?
- There’s a massive shift towards 7-nanometer (nm) that will be (and is) used in literally billions of pieces of technology.
- Who has overwhelming a stranglehold on lithography? ASML
- Who needs lithography? Not much, except for all semiconductor manufacturing… everywhere.
- Want to make advanced 7nm and under chips? Better call AMSL.
So whilst ASML doesn’t make the chips, they make the machines that make chips – with me so far? Companies like Samsung and TSMC are the two main players in the production of these 7nm chips. TSMC help out companies like Apple, AMD, Qualcomm, and others make that jump to 7nm chips.
Think of it as a house with 4 levels. On the bottom floor, you have the things that rely on the chips. Computers, cars, phones, tablets, robots, watches, other exciting shit. Then at level 2, you have the companies that design those chips. AMD, Qualcomm blah blah blah. Above them are the ones that manufacture those chips. Samsung, TSMC – other big players (but few and far between). So who’s in the penthouse, sipping on espresso martinis, jacked to the eyeballs? The ones who make the machines that manufacture the chips – ASML.
Competition? What competition?
These overly complicated nerd machines are expensive and need a lot of research and development. So there are only a few companies that have actually spend the money and time to get to a level of lithography. These companies have no problem with production machines that do lithography but none of them except ASML can do EUV lithography.
In a nutshell, it is an optical process – drawing tiny circuits on wafers (wafer-thin) that come together to become individual chips. Optical geniuses like Canon and Nikon can produce these like ASML via DUV but they are caught with their pants around their ankles when it comes to market share and the R&D ASML has put into this tech. They have about 60% market share by unit volume. Not bhad. But as the machines cost the same as the GDP of a small country, revenue share is over 85% – and that’s just deep ultraviolet lithography, which is used to make older chips with larger transistor sizes.
It’s lonely at the top
These fancy 7nm chips are in all iPhones since the iPhone XS. The more stuff they want to cram into these phones whilst making these chips smaller – that’s where a different process of EUV comes in and take a wild guess which company is the only company in the world that makes these systems? AMD…. just joking it is ASML
Back to the blood, sweat, and tears, ASML has put into this tech. ASML started working on EUV at the turn of the millennium. First prototypes were shipped in 2010… cool so only a decade later. Then they starting selling production-ready systems in 2016. Then came the first high-volume production of chips on EUV until 2019. That’s a long time in the game that other companies need to spend time and money on to get to their level. Even if they do it in half the time, ASML would have a 10yr head start. Global demand for chips is expected to increase year on year. Even if the chip size didn’t decrease, ASML is still in a killer position.
Enough of the good stuff – what are the ASML risks?
There are several risks that could hurt our ASML pick
The future of chip manufacturing
Not everyone is jumping on the EUV bandwagon. Many chip makers are looking at different priorities for their chips. Is theirs going to be cheaper? More power? How efficient will they be? All these questions are answered differently by different companies, each with their own agenda. ASML machines aren’t cheap and if company x goes for a cheaper solution/refinement, this means less money in ASML’s pocket. Although it would have to take a significant portion of the market to think this way to have a significant impact. Some companies are sticking with what they have and looking at refining their current catalogue of chips. So not everyone is moving towards the 7nm and under market just yet.
ASML’s Revenue
Even though my part-time gig as a fortune teller never worked out (should have seen that coming), looking towards the future of chips, we can expect the industry and demand grow year on year. But the complicated thing is, what is going to be in demand moving forward? The semiconductor industry is a fickle industry with a lot of money and research put into it. Each of the chip manufacturers are competing with each other, allocating billions of dollars each year. As ASML’s machines are quite expensive and only sell in low volumes (35 in 2020, up to 50 in 2021) any drop in these numbers will hurt revenue.
Competition
There’s two main things here. New technology that is better than ASML’s EUV and other companies having the same level of tech as ASML’s EUV lithography. Both, whilst possible, aren’t really realistic. New technology comes out every day but there’s nothing on the horizon that ASML aren’t involved in when it comes to chip machine manufacturing. So, for the time being, it remains the sole way for making the machines that make these chips. Being the only company that manufactures EUV machines, it is very unlikely that they’ll lose their monopoly solely because of the effort, time, and money that has to go into it. As I mentioned before, there was a few years’ worth of work that went into EUV. Nikon and Canon “could” have a crack but is it going to be worth their time and effort?
Conclusion
Moore’s Law refers to Moore’s perception that the number of transistors on a microchip doubles every two years, though the cost of computers is halved. Moore’s Law states that we can expect the speed and capability of our computers to increase every couple of years, and we will pay less for them.
As this trend continues, the need for more efficient chips is required. In order to manufacture those chips, when need chip makers. The majority of these chip makers rely on technology to do more and more in the same space. ASML fills that need. Looking at this company, there are certainly good points and risks to be aware of. The short term looks to be slow but the 5yr time horizon has uncapped growth. As the world’s unrelenting need for smaller, faster, more powerful chips in the billions of products produced continues to grow, there is a place in this world for ASML. As an apex company with little to no competition, this is definitely a company worth looking into for a long term hold.
The above information was assisted by Motley Fool, ASML’s Annual Report and Investopedia.
