on 05-Jan-2026 4 January 2026 EU Semiconductors EU Semis: 2026 outlook - Upgrading ASML to Outperform and Top Pick David Dai, CFA +852 2918 5704 david.dai@bernsteinsg.com Carmine Milano +44 20 7762 1857 carmine.milano@bernsteinsg.com 4F2 migration is still a concern for EUV as feature size would increase, but it is likely to be postponed as suppliers prioritize manufacturability over cost in an up cycle. Advanced logic will be another driver with TSMC reportedly expanding 3nm capacity to 180-200kwpm to addr ...

Core Viewpoint - ASML has experienced significant stock growth, rising 59% year-to-date, outperforming major semiconductor stocks and the S&P 500 [2][3]. Company Overview - ASML is a leading manufacturer of machines that produce high-end semiconductor chips, utilizing advanced extreme ultraviolet (EUV) technology, which allows for smaller and more powerful chip components [5][7]. - The company is the sole manufacturer of EUV machines, providing it with a unique competitive advantage in the semiconductor industry [7]. Financial Performance - In the third quarter, ASML reported revenue of 7.51 billion euros ($8.73 billion), a decrease of 2.2% year-over-year, with net bookings at 5.4 billion euros [8]. - The company achieved a gross profit of 3.88 billion euros, resulting in a gross margin of 51.6% and net income of 2.12 billion euros, equating to earnings of 5.49 euros per share [9]. - ASML's guidance for fourth-quarter sales is projected between 9.2 billion euros and 9.8 billion euros, with a margin of 51% to 53% [10]. Market Position - ASML's market capitalization has reached approximately $428 billion, placing it among the top 25 largest publicly traded companies globally [3]. - The stock is currently trading at an all-time high, with a current price around $1,099.47 [10]. Analyst Sentiment - Analysts are largely bullish on ASML, with JPMorgan raising its price target from $1,175 to $1,275, indicating a potential upside of 15% [11]. - Morgan Stanley also increased its price target from $1,132 to $1,161, with only one out of 42 analysts recommending a sell [12]. Future Outlook - The company is viewed as a strong candidate for a stock split as it approaches 2026, having not conducted a split since 2000 [13].

Core Insights - ASML plays a foundational role in advancing AI by providing essential lithography machines necessary for chip manufacturing, particularly in producing advanced AI chips [4][14][17] Company Overview - ASML is the most valuable company in Europe, located in a small city in the southern Netherlands, and is not listed in the S&P 500 [4] - The company has a market capitalization of $430 billion, with a current stock price of $1,111.76 and a gross margin of 52.70% [9] Role in Semiconductor Manufacturing - ASML's extreme ultraviolet (EUV) machines are critical for producing chips with nodes below 7 nanometers, which are essential for advanced AI applications [10][12] - The company has a monopoly on the high-precision machines needed for the production of today's most advanced AI chips, making it a key player in the semiconductor industry [17] Technological Advancements - ASML's EUV machines utilize 13.5nm light for printing features with resolutions unattainable by traditional deep ultraviolet (DUV) machines, enhancing transistor density and performance [12] - The company offers different classes of NXE lithography systems designed for various chip production processes, with high-NA machines providing even greater precision [11][14] Market Position and Future Outlook - ASML is well-positioned to capitalize on the increasing demand for smaller and more powerful AI chips, as its machines are integral to the manufacturing processes of major chipmakers like Nvidia and AMD [16][20] - Approximately 27% of ASML's sales come from servicing its existing equipment, indicating a diversified revenue stream beyond just new machine sales [19] Investment Perspective - ASML is considered a "pick-and-shovel" stock for the AI era, as it benefits from the overall growth in semiconductor demand without being tied to the fortunes of specific chipmakers [2][20]

Core Insights - The Bristlemoon Global Fund achieved a 5.0% return for the September 2025 quarter and a cumulative 19.3% return since inception, net of fees [2] - Key contributors to performance included AppLovin, ASML, and Alphabet, while PAR Technology Corporation, Salesforce, and Hemnet detracted from performance [3] Investment Approach - The fund focuses on compounding capital through investments in high-quality, competitively advantaged businesses with specific traits, including the ability to forecast future earnings and reinvest at high rates of return [5][7] - The portfolio consists of 95.2% long positions and 9.5% short positions, with a net exposure of 85.7% [5] Performance Analysis - The fund's top five long positions as of September 30, 2025, include AerCap Holdings, Alphabet, AppLovin, Hemnet Group, and Uber Technologies [6] - The fund's monthly performance showed fluctuations, with notable returns in September 2025 [6] ASML Holding N.V. - ASML is a monopoly supplier of lithography machines essential for semiconductor fabrication, particularly in the AI and computing sectors [18] - Despite a significant drawdown in stock price, the fund believes the bearish narratives surrounding ASML's growth prospects are misguided, emphasizing the ongoing demand for its technology [20][21] - Concerns regarding demand normalization in China and the transition to new transistor architectures are addressed, with the fund asserting that ASML's market position remains strong [22][24][35] Alphabet Inc - Alphabet has been perceived as struggling to innovate, but the fund argues that recent product launches and advancements in AI demonstrate its competitive edge [40][41] - The narrative of Google Search being disrupted by AI is countered with data showing stable growth in search revenue and the effectiveness of AI Overviews in monetization [51][53] - The company is positioned to leverage its AI capabilities and advertising scale to maintain its market leadership [59] Synopsys Inc - Synopsys is a leading vendor of electronic design automation tools, benefiting from increased design starts in the semiconductor industry [61] - A recent stock price decline following earnings results is viewed as an overreaction, presenting a buying opportunity for a company with strong fundamentals [63][66] PAR Technology Corporation - PAR has faced significant stock price volatility, with a 44% decline attributed to disappointing earnings and growth guidance [68] - The company is focusing on long-term value creation by pursuing large contracts with major clients, which could significantly enhance its annual recurring revenue [75][77] - Despite short-term challenges, the fund maintains a positive outlook on PAR's potential for recovery and growth [83]

Core Viewpoint - ASML Holding N.V. has experienced a significant stock price decline of 25.1% over the past year, underperforming the broader market and major semiconductor companies, despite its strong market position and financial performance [1][3]. Company Performance - ASML's stock underperformance is attributed to macroeconomic pressures and company-specific challenges, including a broader tech sector sell-off and weakening semiconductor demand [4][5]. - The Dutch government's export restrictions on ASML's advanced lithography tools to China have hampered growth prospects, as China accounted for 41% of ASML's lithography shipments in 2024 [6]. - ASML's forward P/E ratio stands at 27.92, which is higher than the Zacks Computer and Technology sector average of 23.92, raising valuation concerns among investors [7]. Technological Leadership - ASML maintains a near-monopoly on extreme ultraviolet (EUV) lithography, essential for producing advanced chips at 3nm and below, positioning it as a key enabler in semiconductor manufacturing [9][11]. - The company's High-NA EUV technology, designed for sub-2nm nodes, represents significant long-term potential, despite slower-than-expected adoption [10]. Financial Performance - ASML reported €9.26 billion in net sales for Q4 2024, a 24% year-over-year increase, with net income rising 30% to €2.69 billion and EPS growing 30% to €6.85 [12]. - The gross margin expanded by 90 basis points year-over-year to 51.7%, reflecting strong cost management and productivity improvements [13]. - For 2025, ASML expects a 15% revenue growth, driven by rising demand for EUV and DUV lithography systems, along with anticipated margin expansions [14]. Order Backlog and Revenue Visibility - ASML has a record-high order backlog of €36 billion, providing strong revenue visibility, with €7.1 billion in new orders booked in Q4 2024 [15][16]. - The demand for ASML's lithography tools is driven by the AI boom and the need for next-generation chip production [17][18]. Conclusion - Despite facing near-term challenges, ASML's technological leadership, robust financials, and substantial order backlog indicate strong long-term growth potential, making it a compelling hold for investors [19][20].

Financial Data and Key Metrics Changes - In 2023, ASML achieved total revenue of €27.6 billion, a 30% increase compared to the previous year, despite the semiconductor industry experiencing an 8% decline [15][17] - The gross margin improved to 51.3%, with net income reported at €7.8 billion and net bookings at €20 billion [17][25] - The company returned €3.3 billion to shareholders, including €2.3 billion in dividends and €1 billion in share buybacks [18][37] Business Line Data and Key Metrics Changes - The Logic business saw substantial growth, increasing from approximately €10 billion in 2022 to nearly €16 billion in 2023, driven by demand for advanced logic and mature technologies [18][20] - EUV technology sales grew by 30%, while DPV sales surged by 60%, indicating strong demand for immersion technology [17][18] - The applications business experienced a slight decline, attributed to its shorter lead time and lack of significant backlog [18] Market Data and Key Metrics Changes - ASML's sales in China increased significantly, rising from 14% to 29% of total sales, reflecting the company's ability to meet previously unmet demand in the region [21] - The company noted that the semiconductor market is expected to grow from €600 billion to around €1 trillion by 2030, indicating a robust long-term outlook for the industry [55] Company Strategy and Development Direction - ASML is preparing for significant growth in 2025, viewing 2024 as a transition year with expected revenue levels similar to 2023 [32][33] - The company is focused on building capacity and hiring talent to meet anticipated demand, particularly in advanced technologies [33][56] - ASML emphasizes the importance of sustainability and ESG initiatives, aiming for net-zero greenhouse gas emissions by 2040 [59][64] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the current downturn in the semiconductor industry but expressed confidence in a recovery, citing improved customer dynamics and tool utilization [34][35] - The company expects a stronger second half of 2024, driven by a healthy order intake and improved market conditions [34][36] Other Important Information - ASML's R&D expenditure reached €4 billion in 2023, reflecting the company's commitment to innovation and technology development [25][30] - The company reported a healthy cash balance of around €7 billion, providing resilience amid industry challenges [26] Q&A Session: All Questions and Answers Question: Impact of US Government Restrictions on Advanced DUV Machines - Management indicated that the restrictions would not significantly affect the 2025 or 2030 financial targets, as the impact is limited to specific factories under export control [80][89] Question: China's Advancements in DUV Technology - Management clarified that while China can technically achieve 5nm chips using multi-patterning, the economic feasibility for high-volume manufacturing remains a challenge [91][92] Question: Adoption of High NA EUV Technology - Management expressed confidence in the adoption of high NA EUV technology, noting that initial customer interest is strong, and the adoption will be gradual [94][96] Question: Free Cash Flow and Backlog Recovery - Management acknowledged that free cash flow is under pressure due to lower contract liabilities but expects a recovery in backlog as orders return [82][104] Question: Expansion Potential in Eindhoven - Management confirmed ongoing discussions with the Dutch government regarding expansion plans and emphasized the need for a supportive investment climate [83][102]