ASML: The Linchpin To The Next Cloud Super Cycle

ASML Stock Performance and Market Position - ASML stock has shown strong performance, rallying +24.4% after a -13.4% pullback to $850s in early May 2024, and is currently trading at +6.6% compared to the wider market at +6.2% [1] - The stock is retesting its all-time high of $1.06Ks, moving away from its 50/100/200 day moving averages [3] - ASML is considered a linchpin in the semiconductor industry, benefiting from the generative AI boom and semiconductor nationalism post-COVID-19 [6] Revenue and Capacity Expansion - ASML's management raised FY2025 revenue guidance to the upper half of €30B to €40B, with adjusted gross margins up to 56%, compared to previous guidance of €24B to €30B in 2021 and €30B to €40B in 2022 [4] - The company plans to significantly expand production capacity by 2025/2026, with DUV units increasing to 600, low NA EUV to 90, and High NA EUV to 6 (up to 20 by 2028), compared to 2023 levels of 396, 42, and 1 units respectively [4] - ASML's capacity constraints are due to high demand, with a multi-year backlog of €38B and net bookings of €3.61B in FQ1'24 [4] Industry Trends and Demand Drivers - The semiconductor and server industries are experiencing hyper-growth, driven by the AI boom, with companies like Nvidia (NVDA) reporting FQ1'25 revenues of $26.04B (+17.8% QoQ, +262.1% YoY) and guiding FQ2'25 revenues of $28B (+7.5% QoQ, +107.4% YoY) [4] - TSMC and Super Micro Computer (SMCI) are also increasing capex and expanding manufacturing capacities to meet the growing demand for AI chips [4] - The automotive and renewable energy sectors are increasingly consuming more semiconductor chips, providing additional growth drivers for ASML [5] Valuation and Investment Outlook - ASML's forward P/E valuation has climbed to 44.57x, nearing the peak of 47x observed in November 2021 [6] - The company maintains a strong competitive moat, with no significant competition expected in the next 20 years, though Canon's nanoimprint lithography machines may pose a minimal threat in the future [6] - A fair value estimate of $769.60 is maintained based on a 1Y P/E mean of 35.55x, with a 2Y price target of $1.29K, offering a potential upside of +21.6% from current levels [6] - The stock is recommended as a Buy, with investors advised to consider dollar-cost averaging and adding positions during moderate retracements for improved margin of safety [6]