We came across a bullish thesis on ASML Holding N.V. (ASML) on Substack by Kontra Investments. In this article, we will summarize the bulls’ thesis on ASML. ASML Holding N.V. (ASML)'s share was trading at $674.58 as of March 28^th. ASML’s trailing and forward P/E were 32.64 and 25.91 respectively according to Yahoo Finance.

An automated manufacturing production line of semiconductor components on an assembly line.

ASML, founded in 1984 as a spin-off from Philips, has cemented itself as the most crucial company in the semiconductor industry. Headquartered in the Netherlands, ASML employs over 44,000 people worldwide and plays an indispensable role in advancing Moore’s Law. As the sole provider of Extreme Ultraviolet (EUV) lithography systems, ASML holds a near-monopoly on the most advanced semiconductor manufacturing technology, creating high customer dependency and an unmatched competitive moat. Despite near-term headwinds such as geopolitical tensions and regulatory risks, ASML’s technological dominance and robust financial performance underscore a compelling long-term investment thesis. The launch of its High-NA EUV systems in 2025 will further solidify its leadership, enabling semiconductor manufacturers to push the boundaries of chip miniaturization and performance.

ASML’s financials remain strong, with 2024 revenue reaching €28.26 billion, up from €27.56 billion in 2023, and projected to grow 9% to €30.84 billion in 2025. EBIT margins are at a healthy 32.1% and are expected to expand to 43.6% by 2029 due to increasing EUV equipment sales and a growing installed base. Net earnings for 2024 stood at €7.39 billion, slightly lower than 2023 due to temporary industry challenges, but long-term projections remain robust. Earnings per share are expected to nearly triple from €18.79 in 2024 to €46.59 by 2029, supported by ASML’s strong pricing power, high switching costs, and continuous innovation.

ASML’s dominance is driven by its technological superiority, particularly its EUV lithography systems, which are essential for manufacturing the most advanced semiconductor chips. The company commands 90% market share in lithography systems, with competitors unable to match its scale and expertise. High-NA EUV, set for deployment in 2025, will further widen ASML’s lead, ensuring continued reliance from top chipmakers like TSMC, Samsung, and Intel. Despite reports of China developing an alternative EUV technology, ASML remains far ahead due to superior power efficiency, established manufacturing processes, and deep integration with global semiconductor supply chains. The complexity of EUV technology, which requires specialized optics, mirrors, and supporting infrastructure, makes it unlikely that China will challenge ASML’s dominance in the foreseeable future.

The company’s strong financials are supported by a resilient and high-margin business model. ASML’s lithography equipment has significant switching costs, locking in customers for decades due to their reliance on ASML’s technology. Once a fab adopts ASML’s EUV systems, shifting to an alternative supplier would require billions in retooling and risk major disruptions in yield. This ensures long-term revenue stability through services, upgrades, and recurring maintenance. Notably, DUV systems generate 130% of their initial sale price in service revenue over their lifecycle, while EUV systems could exceed 150%, making ASML’s installed base a reliable and growing cash flow generator.

Geopolitical risks remain a concern, particularly regarding ASML’s exposure to China, which accounted for 36% of 2024 revenue. Recent U.S. and Dutch export restrictions on advanced DUV systems pose potential headwinds, though ASML has navigated these challenges effectively. While further regulatory tightening could impact sales, ASML’s backlog and global customer base provide a strong buffer. Additionally, the company’s continued investments in R&D—€4.3 billion in 2024—ensure that it stays at the forefront of semiconductor innovation.

ESG factors further enhance ASML’s attractiveness. The company has significantly reduced the energy consumption of its EUV systems, lowering operational costs for customers while addressing environmental concerns. Sustainability remains a priority, with continued efficiency improvements reinforcing ASML’s long-term value proposition.

ASML presents an exceptional long-term investment opportunity driven by its technological moat, financial strength, and growing dominance in semiconductor manufacturing. Valuation-wise, ASML trades at a P/E of 32x for 2024 earnings, which may seem high but is justified by its projected earnings growth of over 10% annually and an exceptional return on invested capital (ROIC) expected to exceed 100% by 2027. Compared to peers in the Magnificent 7, ASML’s valuation aligns with high-growth technology leaders like Nvidia and Amazon. Using a discounted cash flow (DCF) model with an 8.5% discount rate and a 20x EV/EBITDA multiple, ASML’s fair value is estimated at approximately €770 per share, presenting an attractive upside from current levels. Additionally, the stock’s P/E is expected to decline to 14x by 2029 as earnings accelerate, while the EV/EBITDA ratio is set to fall from 31x to 11x, making ASML an increasingly compelling long-term opportunity. With multiple tailwinds, including the rollout of High-NA EUV, ASML is well-positioned to deliver significant shareholder value in the coming years.

ASML Holding N.V. (ASML) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 86 hedge fund portfolios held ASML at the end of the fourth quarter which was 64 in the previous quarter. While we acknowledge the risk and potential of ASML as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ASML but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article was originally published at Insider Monkey.