The Brainport’s Brightests: Why ASML Is More Exciting Than NVIDIA

After NVIDIA posted better than expected revenue forecasts, the company saw its share price increase significantly as investors predict further application of A.I. tools will continue to drive the appetite for NVIDIA's chips. NVIDIA's success will most likely spillover to its suppliers, such as TSMC and indirectly ASML, monopolist in the advanced lithography machinery market.

Where NVIDIA (NVDA) is traditional known for its graphics processing units (GPUs) mainly used in the gaming sector, over the past few years it has been able to increase its growth in the Data Center category. NVIDIA’s GPUs facilitate developers enabling them to setup complex computations processes, machine learning, deep-tech applications. Revenue has more than doubled last year to $26B, a huge increase compared to 2020 when FY revenue equaled $10.9B. The recent surge in stock price came after company provided a whopping $11B Q2 revenue forecast. However, NVIDIA is not the only company which is enjoying a leading position in this fast developing sector as the whole supply chain will most likely enjoy a boost due to exponentially growing demand for computational processing power required for A.I. systems. On Thursday TSMC and ASML shares were up 3 and 5 percent respectively.

The importance of ASML’s extreme ultraviolet (EUV) machinery has been underlined back in 2012 when Intel, Samsung en TSMC backed the company with over $5B in funds to continue to develop the EUV machines they were working on as ASML was struggling with higher than expects expenses and a delayed delivery. Since 2019 when the EUV came on the market growth has been limited mainly by production capacity rather than demand as TSMC and Samsung continue to order ASML’s equipment.

While NVIDIA is also enjoying a monopolistic market position for its GPUs, it is facing some competition by AMD (AMD) that controls the rest of the GPU market with an estimated market share of 20 percent. AMD on the other hand is able to produce more lower-end chips that are cheaper than NVIDIA’s chips. However, it should be noted that AMD does not have any chips that can compete with NVIDIA’s A.I. chips.

Geopolitical Tensions May Limit Growth

In recent years the U.S. and Europe have been increasingly wary of some high technological trade to China as the advanced chips can be used in military equipment used against them. Where many technological companies are increasingly avoiding trade with China due to its lack of patent protective legislation, the semiconductor and chip market were not incentivized to review their position in China as their products are simply to advanced to copy. The push from the U.S. to limit sales of the most advanced technologies to China has been backed by other allies, as the Dutch government banned the sales of ASML’s DUV machinery to be delivered to China as it can be used to manufacture chips used in military drones. While China is responsible for 15 percent of all ASML sales or $2.7B, the company will redirect its focus on other orders in the pipeline totaling a tremendous $40 billion.

ASML Services Income Provides Buffer Against Potential Headwinds

While the next generation of EUV machinery is expected to be released at the end of this year, ASML’s current revenue distribution seems well balanced and less affected by potential headwinds as over 20 percent of their sales comes from services related to the installation and maintenance after delivery of their machine to their clients. In other words, their machinery is so advanced that a highly specialized on-site team support is needed to operate the machine and reduce the amount of down turns. ASML has a critical position here as lithography is the bottleneck in the fabrication of wafers for semiconductors. The Installed Base Management provided by ASML can manage to ensure high availability and minimal long-term downs which can lead to cost reductions and efficiency gains which directly boost wafer production and revenue income as supply rather than demand is the constraint in this hot market.

Figure 1 – Net Sales by End-use ASML

ASML Stock Safest Chip Bet

With 10 consecutive years of dividend growth and a rolling share buyback program of $12B the company is rewarding investors with some excellent returns. At the same time the company keeps on spending up to $1B per quarter on R&D to continue to maintain its leading market position. With a PE ratio of 39 the stock seems relatively expensive but considering the growth expectations and the fact that it stands at the top of the chip-chain, ASML is much safer bet compared to NVIDIA that is trading at multiple times its earnings. While Tesla has proven that high PE-ratios do not paint the full picture, it does show the AI frenzy the market is currently in. At the same time NVIDIA is also issuing up to $10B in new stock that could dilute the share price, while the Fed continues to tighten due to persisting core inflation.

Figure 2 – ASML Investor Returns

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