ASML Investment Analysis Report

Introduction

ASML’s core investment thesis lies in its strong technological moat and near-indispensable position in EUV lithography, combined with rising advanced-node capital expenditure driven by AI demand. In 2025, ASML generated approximately €32.7bn in revenue, achieved a 52.8% gross margin and €9.6bn in net income, while year-end backlog reached €38.8bn, providing strong earnings visibility. Looking ahead, AI infrastructure investment, continued advanced-node migration and the commercialization of High NA EUV are expected to support long-term growth, while its expanding installed base should further strengthen recurring service revenue. Key risks include customer capex cycles, export controls and the sustainability of AI investment. Overall, ASML’s long-term fundamentals remain strong, but its current valuation already reflects high growth expectations. The stock therefore offers stronger appeal for long-term investors with a 3–5 year horizon than for short-term investors, with further upside dependent on earnings continuing to exceed market expectations.

Part One: Key Findings and Investment Rationale

1.1 What does the company do?

ASML is the world’s leading supplier of semiconductor lithography equipment. It holds a monopoly on the high-end EUV (extreme ultraviolet lithography) equipment market and is an indispensable core equipment manufacturer for advanced chip manufacturing processes. The company provides chip manufacturers with hardware, software and services to mass-produce patterns for integrated circuits (microchips). Together with its partners, ASML drives the development of microchips that offer better value for money, superior performance and greater energy efficiency. ASML enables breakthrough technologies to be applied to solving some of the most pressing challenges facing humanity, such as healthcare, energy use and conservation, transport and agriculture.

1.2 What are the current market expectations?

In the short term, the gradual recovery of the semiconductor cycle is driving a rebound in equipment orders, whilst investment in AI infrastructure is further fuelling growth in capital expenditure related to advanced processes, providing direct support for ASML’s orders and revenue. ASML’s management has indicated that market expectations regarding the outlook for the semiconductor industry have improved significantly; in particular, growing demand for AI-related data centres and infrastructure is driving customers in the logic and memory chip sectors to increase investment in advanced process capacity, which in turn is further driving demand for advanced lithography equipment such as EUV. At the same time, businesses such as metrology, inspection and installation management are also expected to maintain growth.

In the long term, the continued growth in demand for AI chips will drive the ongoing expansion of advanced process capacity, and advanced processes are highly dependent on EUV lithography equipment. With the world’s sole capability to commercialise EUV technology, ASML possesses formidable technological barriers and irreplaceability in the field of advanced lithography, enabling it to continuously derive value from growth in downstream capital expenditure whilst maintaining strong pricing power. Consequently, ASML’s long-term growth relies not merely on a recovery in the semiconductor cycle, but is founded upon the structural transmission logic of ‘growing AI demand → expansion of advanced process capacity → increased demand for EUV → value capture by ASML’.

Part Two: Deconstructing the Business Model

2.1 Products/Services: What is being sold?

ASML primarily provides semiconductor lithography equipment and related services. The company’s core products include EUV (extreme ultraviolet) and DUV (deep ultraviolet) lithography systems. Among these, EUV lithography systems are currently indispensable key equipment in the manufacture of chips using advanced processes; they are primarily used in advanced nodes of 7 nm and below for the production of AI chips, high-performance computing chips and high-end logic chips; DUV lithography systems, on the other hand, are primarily used in mature processes, memory chips, and sectors such as automotive electronics and power semiconductors. In addition, ASML provides services including equipment maintenance, spare parts supply and software upgrades, offering customers full lifecycle support.

2.2 Who are they selling to?

ASML primarily supplies lithography equipment and related services to the world’s leading semiconductor manufacturers. Its client base mainly comprises foundries and integrated device manufacturers (IDMs), which can be further categorised into logic chip and memory chip manufacturers. Representative clients include global semiconductor leaders such as TSMC, Samsung and Intel. Logic clients are primarily engaged in the manufacture of chips using advanced processes and represent a key source of demand for EUV equipment; Memory customers, on the other hand, are primarily engaged in the production of memory chips such as DRAM and HBM. ASML’s customer base is concentrated amongst a small number of large semiconductor firms worldwide that possess advanced manufacturing capabilities. On the one hand, these customers themselves possess high technical barriers to entry and the capacity for significant capital expenditure; on the other hand, advanced processes place extremely high demands on lithographic precision, equipment stability and yield rates, meaning wafer fabs must rely on ASML’s high-end lithography equipment, thereby creating high customer loyalty and high switching costs.

2.3 Why do customers choose ASML?

The core reason customers are willing to purchase ASML equipment lies in the fact that the lithography stage is a critical step determining chip performance and process technology level, and EUV technology is currently virtually irreplaceable. Advanced chip manufacturing requires continuous improvements in transistor density and the scaling of process nodes, whilst EUV equipment can significantly enhance manufacturing precision, enabling wafer fabs to produce higher-performance chips with greater commercial value. Furthermore, given the long R&D cycles and high technical complexity of lithography equipment, coupled with the need for extensive process validation and fine-tuning following equipment deployment, the cost for customers to switch suppliers is extremely high; consequently, ASML enjoys strong bargaining power. Additionally, against the backdrop of advanced packaging emerging as a key breakthrough for enhancing chip performance, Chinese wafer fabs are accelerating the construction of 2.5D/3D packaging production lines. ASML’s continued investment in equipment and services related to advanced packaging—such as the XT:260 system—aligns closely with mainland China’s development strategy of using packaging to drive improvements in system capabilities. Consequently, despite systemic pressures arising from external conditions and multiple constraints within the supply chain, the mainland market has maintained a high order-to-revenue conversion rate.

2.4 One-off or recurring payments?

In terms of revenue model, ASML’s revenue derives primarily from the sale of high-value lithography equipment, which follows a typical one-off, large-scale capital expenditure model; the scale of its orders is highly correlated with the capital expenditure cycles of wafer fabs. At the same time, as the number of ASML installations increases globally, the company generates recurring revenue through equipment maintenance, upgrade services and the supply of spare parts. Compared to relying solely on equipment sales, the services business offers greater stability and higher-quality profitability, enabling ASML to gradually develop a business model where ‘equipment sales drive growth, whilst service revenue enhances stability’.

2.5 Revenue drivers

ASML’s revenue growth is driven by a combination of foundry capital expenditure, demand for advanced processes, product mix upgrades and services for installed equipment. In 2025, the company’s total net sales reached €32.7 billion, representing a year-on-year increase of 15.6 per cent; its net system sales stood at €24.5 billion, up 12.4 per cent year-on-year, whilst net service and field option sales amounted to €8.2 billion, a year-on-year increase of 26.2 per cent. In terms of revenue composition, the Logic, Memory and Services segments contributed €16.1 billion, €8.4 billion and €8.2 billion respectively.

Firstly, customer capital expenditure is the key demand driver for ASML’s equipment revenue. (The scale of equipment procurement is closely linked to customer capital expenditure.) ASML has explicitly stated that the year-on-year increase of €2.9 billion in Logic revenue in 2025 is primarily driven by growth in advanced foundry services, demand for AI, and customers building capacity for next-generation processes; demand for Memory, meanwhile, is supported by investment in HBM and DDR5 driven by AI-related applications. ASML’s revenue growth is primarily driven by existing customers expanding their advanced process capacity and capital expenditure, whilst also being influenced by the entry of new and additional customers spurred by AI. As the number of customers globally with advanced process capabilities is limited, an expansion in the customer base is not the primary driver of growth.

Secondly, growth in equipment sales constitutes the direct source of revenue growth, but product mix is more important than volume alone. In 2025, ASML’s system sales revenue grew by 12.4 per cent, primarily driven by increased sales of EUV and DUV immersion systems, whilst sales of certain ArF dry, KrF and i-line systems declined. Over the course of the year, the company recognised revenue from 48 EUV systems and 279 DUV systems. Consequently, ASML’s growth is not simply achieved by ‘selling more equipment’, but is influenced by varying product demand and changes in the product mix. In particular, the growth of high-value EUV products represents a key structural driver. In 2025, sales of EUV systems reached €11.6 billion, a year-on-year increase of 39 per cent; the share of EUV in system revenue rose from 38 per cent in 2024 to 48 per cent, making it the single largest technology category in the company’s system revenue, significantly outpacing the 12.4 per cent growth rate of overall system sales. As at the end of 2025, €25.5 billion of the company’s €38.8 billion in outstanding orders were for EUV systems. In the fourth quarter of 2025, ASML also recognised revenue from two High-NA EUV systems. In the fourth quarter of 2025, ASML also recognised revenue from two High-NA EUV systems; during the same period, sales of DUV systems amounted to approximately €12 billion, a year-on-year decrease of 6 per cent. This indicates that growing demand for advanced processes is driving ASML’s revenue towards high-value EUV products. ASML President and CEO Ke-Li Fu stated: “ ‘Based on current market momentum, we plan to increase capacity by 30 per cent in 2027, building on our 2026 production capacity plan of approximately 65 low-numerical-aperture (Low NA) EUV systems, and are exploring a further 30 per cent increase in capacity for 2028.’ Meanwhile, as High-NA EUV systems gradually enter the commercialisation phase, they are expected to further expand the market for advanced process equipment and enhance product value.

Thirdly, service and upgrade operations provide ASML with a sustainable source of revenue. As the global installed base of ASML equipment continues to expand, the company is able to generate ongoing revenue through equipment maintenance, software upgrades, spare parts and on-site support. In 2025, revenue from Installed Base Management reached €8.2 billion, representing year-on-year growth of 26.2 per cent, which was significantly higher than the growth rate of system sales, and has become the second-largest source of revenue after system sales. After-sales services for the installed base primarily comprise revenue from services, spare parts, software and upgrades relating to installed equipment; this indicates that ASML has established a ‘recurring revenue stream’ approaching €10 billion in scale. Fu Keli stated that net sales and gross margin in the second quarter of 2026 were both higher than expected, primarily due to stronger-than-expected sales from post-installation services. Growth in this segment stemmed mainly from the expanding installed base, higher utilisation rates of lithography systems, and an increase in on-site NXE upgrades. Consequently, as historically sold equipment gradually comes into its own, ASML’s installed base can be continuously converted into service revenue, thereby mitigating, to some extent, the cyclical volatility associated with a reliance solely on new equipment sales. This reflects a shift in ASML’s revenue structure: from a previous model centred on ‘selling equipment’ to a more balanced structure of ‘equipment plus full lifecycle services’. ASML has thus built up a ‘recurring revenue pool’ worth nearly 10 billion euros.

Finally, ASML has continued to strengthen its computational lithography software, metrology and inspection businesses in recent years, essentially building a pattern engineering platform centred on exposure. In 2025, sales of its metrology and inspection systems rose by 28 per cent year-on-year to €825 million. This was primarily driven by increased sales of YieldStar and electron beam (e-beam) systems. Furthermore, the adoption rate of multi-e-beam inspection continued to rise, thanks to improvements in maturity and production efficiency. Looking further ahead, ASML also made a strategic investment of €1.3 billion in Mistral AI to utilise artificial intelligence to enhance ASML’s core competitiveness.

2.6 Cost and Profit Structure

Overall, ASML’s cost structure can be divided into three categories: equipment and service delivery costs, research and development expenditure, and corporate operating and administrative expenses. Among these, ‘System Sales Cost’ is the largest cost item, reflecting the supply chain and production inputs required for equipment manufacturing and delivery; service and on-site upgrade costs primarily increase as the installed base of equipment expands; research and development represents the core investment through which ASML maintains its technological leadership and develops next-generation EUV products; Sales and administration costs primarily support the company’s sales and day-to-day operations.

2.7 System Sales Costs

ASML’s system sales costs primarily correspond to the production and delivery costs of lithography systems and metrology equipment. In 2025, system sales costs amounted to approximately €11.384 billion, primarily allocated to the procurement and manufacture of high-precision components and modules required for the equipment, as well as production processes such as system integration, assembly, testing and calibration. In addition, the company incurs costs relating to the remuneration of manufacturing and engineering staff, production facilities and equipment, as well as product warranties. Given the high complexity of ASML’s equipment, the company relies on specialist global suppliers for a large number of critical components; consequently, the external supply chain constitutes a significant component of system cost of sales.

2.8 Service and On-site Upgrade Costs

ASML’s service and on-site upgrade costs primarily arise from the maintenance, technical support, replacement of spare parts and on-site upgrades of installed equipment. In 2025, these costs amounted to €4.025 billion. As ASML’s global installed base continues to expand, customer demand for equipment maintenance, spare parts and technical support is increasing in tandem; simultaneously, on-site upgrades for EUV systems such as the NXE have become a significant component of the services business. Consequently, these costs primarily grow in line with the expansion of the company’s installed base and the scale of its services business.

2.9 Research and Development Costs

Research and development represents a significant long-term investment for ASML. In 2025, R&D expenditure reached €4.699 billion, a year-on-year increase of 9.2 per cent, accounting for approximately 14.4 per cent of revenue. The primary focus was on EUV and next-generation lithography technologies, including the NXE series of systems, the EXE High-NA EUV system, and related improvements in production efficiency, equipment performance and reliability. At the same time, the company continues to invest in areas such as electron beam inspection, metrology, YieldStar and software. The core objective of R&D investment is not to support current product sales, but to maintain ASML’s leading position in advanced lithography technology and to drive the commercialisation of next-generation products.

2.10 Sales and Administration

This primarily comprises expenditure relating to sales, general management and administration. In 2025, SG&A amounted to €1.258 billion, primarily allocated to functions such as sales and customer support, corporate management, finance, human resources, IT, legal and compliance. One of the main reasons for the growth in ASML’s SG&A in 2025 was the increase in average staff wages and remuneration levels; consequently, this cost is closely linked to the company’s workforce size and its overall operational management system.

2.11 Gross profit margin/net profit margin levels and reasons for changes

In 2025, ASML achieved net sales of €32.7 billion, with a gross profit of €17.26 billion and a gross profit margin of 52.8 per cent;

In terms of changes in profit margins, ASML has generally maintained a high level of profitability. The company’s gross profit margin rose from 48.6 per cent in 2020 to 52.7 per cent in 2021, fell back to 50.5 per cent in 2022, stood at 51.3 per cent in both 2023 and 2024, and rose further to 52.8 per cent in 2025. Over the same period, the net profit margin rose from 25.4 per cent in 2020 to 31.6 per cent in 2021, fell to 26.6 per cent in 2022, recovered to 28.4 per cent in 2023, dipped to 26.8 per cent in 2024, and is projected to reach approximately 29.4 per cent in 2025. Overall, ASML’s profit margins have remained at a high level over the long term, though they are subject to periodic fluctuations influenced by factors such as product mix, the profitability of EUV systems, growth in the services business, the semiconductor industry cycle and R&D expenditure.

(Gross and net profit margin data for 2020–2025 are sourced from ASML’s annual US GAAP financial disclosures)

Between 2020 and 2021, ASML’s gross profit margin rose significantly from 48.6 per cent to 52.7 per cent. The increase in 2020 was primarily driven by improved profitability of EUV systems and growth in the services and upgrades business; profitability in the EUV business was enhanced by increasing the value generated by EUV systems and continuously optimising the cost structure. By 2021, the improvement in profitability stemmed primarily from increased sales of advanced DUV systems and enhanced profitability of EUV systems such as the NXE:3600D, whilst the Installed Base business was driven by productivity upgrades and an increase in the installed base of EUV equipment. Consequently, the rise in profit margins from 2020 to 2021 is supported by clear evidence at the corporate level; the core driver was not merely volume growth, but rather a combination of improved profitability from high-value products and the expansion of the services business.

In 2022, ASML’s gross profit margin fell from 52.7 per cent in 2021 to 50.5 per cent, whilst its net profit margin fell from 31.6 per cent to 26.6 per cent. Although the company’s turnover continued to grow, reaching €21.2bn, profit margins came under pressure, indicating that revenue growth had not fully translated into higher profits. The decline in profit margins in 2022 was primarily driven by a combination of factors, including supply chain constraints, changes in product and delivery mix, and continued increases in investment in research and development and capacity expansion. In particular, ASML faced supply shortages of key components as well as capacity and delivery pressures relating to EUV equipment, whilst continuing to invest in R&D to maintain its technological lead and expand production capacity. It should be noted that ASML did not attribute the decline in gross margin to a single factor; therefore, from a more rigorous perspective, the decline in profit margins in 2022 was the result of multiple operational factors acting in concert. According to ASML’s annual report, the company achieved net revenue of €5.624bn in 2022, with a gross margin of 50.5 per cent.

In 2023, the gross profit margin recovered to 51.3 per cent, whilst the net profit margin rebounded to 28.4 per cent. That year, ASML’s turnover rose by 30 per cent year-on-year to €27.6bn, with the gross profit margin increasing by 0.8 percentage points compared with 2022. ASML explicitly stated that in 2023, the supply constraints the company had previously experienced in 2021 and 2022 began to ease; at the same time, its EUV, DUV and installed base businesses continued to grow, and the company also delivered its first High-NA EUV system modules. Consequently, the recovery in profit margins in 2023 can reasonably be attributed to the easing of supply chain constraints, the expansion of revenue scale and the continued growth of its high-end products and services business.

In 2024, the gross profit margin remained at 51.3 per cent, essentially unchanged from 2023, whilst the net profit margin fell from 28.4 per cent to approximately 26.8 per cent. This change indicates that the profitability of ASML’s core product sales remained broadly stable during the year, but expenses below the gross profit level exerted greater pressure on the final net profit. In 2024, the company’s R&D expenditure reached €4.3bn, whilst it continued to advance next-generation technologies such as High-NA EUV; ASML’s full-year net profit stood at €7.6bn, compared with €7.8bn in 2023. The decline in the net profit margin in 2024 was not primarily caused by a deterioration in the gross profit margin; rather, whilst the gross profit margin remained stable, expenditure on R&D and other operating costs exerted some pressure on net profit. However, the decline in the net profit margin cannot be attributed solely to R&D expenditure.

A more pronounced improvement in profitability is expected in 2025. ASML’s full-year turnover reached €32.7bn, with the gross margin rising from 51.3 per cent in 2024 to 52.8 per cent, whilst net profit increased from €7.6bn to €9.6bn, representing a net profit margin of approximately 29.4 per cent. In terms of business structure, both system sales and equipment installation and maintenance services recorded growth in 2025, with revenue from equipment installation and maintenance services reaching €8.2bn, a year-on-year increase of 26.2 per cent. Meanwhile, ASML stated that growth in 2025 was primarily driven by demand for advanced logic, AI-related applications and customers’ capacity expansion for next-generation processes. Furthermore, the company continued to advance the commercialisation of High-NA EUV in 2025 and recognised revenue from two High-NA systems in the fourth quarter. Consequently, the improvement in profit margins in 2025 is supported by data from several factors: growing demand for high-end EUV, an improved product mix, the expansion of the installed base services business, and an increase in revenue scale.

Overall, ASML’s profit margins have demonstrated considerable resilience. Historical data indicates that fluctuations in gross profit margins are closely linked to the profitability of EUV systems, product mix, services and upgrades, as well as supply chain and production efficiency; net profit margins, however, are influenced not only by gross profit margins but also by research and development, sales and administrative expenses, and other non-operating factors. Consequently, when assessing ASML’s future profitability, one must look beyond mere equipment sales figures and focus instead on the proportion of EUV and High-NA products, the value and profitability per unit, revenue from services for the installed base, cost efficiency, and whether R&D expenditure ultimately translates into commercial revenue. The simultaneous improvement in gross and net profit margins in 2025 is currently a relatively positive signal regarding the quality of earnings; however, its sustainability still requires further validation through subsequent volume growth of High-NA EUV systems, EUV demand and the expansion of the services business.

2.12 Business Model Classification

Technology-driven business + Cyclical business

ASML is, by its very nature, a semiconductor equipment business characterised by high technological barriers, whilst also exhibiting distinct cyclical attributes. Compared to traditional manufacturing enterprises, ASML does not derive its profits from scale expansion or low-cost competition, but rather from long-term technological accumulation, patent barriers and supply chain integration capabilities, which enable it to establish strong pricing power in key technological areas. Consequently, in terms of valuation logic, ASML is more akin to a high-barrier, growth-oriented technology company than to a typical cyclical equipment firm.

Firstly, from a business model perspective, ASML is a typical technology company. The company’s core competitiveness stems from EUV lithography technology, which encompasses multiple fields including extreme ultraviolet light sources, high-precision optical systems, precision motion control and complex software systems; it is characterised by long research and development cycles and a high degree of technical complexity. Currently, ASML is the only company in the world capable of commercialising and mass-producing EUV lithography equipment, making it indispensable in the manufacturing of advanced-process semiconductors. Due to the extremely high technical barriers, its competitive advantage does not stem from short-term cost advantages, but rather from long-term barriers built up through years of R&D investment, supply chain integration capabilities and customer certification.

Secondly, ASML also exhibits characteristics typical of a cyclical industry. Demand for semiconductor equipment is highly correlated with capital expenditure by wafer fabs, which in turn is influenced by chip demand, inventory cycles and the macroeconomic environment. When the semiconductor industry is booming, wafer fabs expand capacity and increase equipment procurement, driving growth in ASML’s order book; when the industry enters a correction phase, customers may delay capital expenditure, leading to a short-term decline in equipment orders. Consequently, ASML’s revenue is subject to a certain degree of cyclical volatility.

However, unlike typical cyclical equipment companies, ASML’s cyclical nature is cushioned by its technological monopoly and the demand for advanced processes. As EUV equipment is essential for the manufacture of advanced chips, leading foundries still need to continue investing in advanced process capacity even during industry downturns. Furthermore, with the rapid global development of sectors such as AI and high-performance computing, the increasing demand for advanced-process chips is expected to propel ASML into a long-term growth cycle.

From a valuation perspective, ASML should not be valued solely based on the low P/E ratio logic typically applied to traditional cyclical equipment companies. When valuing cyclical stocks, the market usually focuses on whether current earnings are at a cyclical peak; however, given its technological monopoly, sustained growth and high profitability, ASML is more akin to a ‘platform technology company’, with investors paying greater attention to its long-term growth potential, technological leadership and future cash flow generation capabilities. Consequently, its valuation typically incorporates a significant technology premium.

2.13 Key Conclusions

ASML’s core source of profit lies in generating high-value equipment sales revenue by providing indispensable lithography equipment for advanced semiconductor manufacturing, whilst also securing recurring service revenue through its extensive installed base. Put simply, ASML’s profitability does not stem from the manufacture of the equipment itself, but rather from its technological monopoly and pricing power in critical stages of advanced chip manufacturing. The company generates one-off revenue primarily through the sale of EUV and DUV lithography systems. At the same time, as global wafer fabs continue to deploy advanced process lines, the company generates recurring revenue through equipment maintenance, software upgrades and spare parts services, further enhancing the stability of its earnings.

2.14 Is this revenue stream sustainable?

It possesses strong sustainability, primarily for the following reasons:

Firstly, technological barriers create a long-term competitive advantage. EUV lithography technology spans multiple fields, including optics, materials, precision mechanics and software control, requiring long-term R&D investment and supply chain coordination; competitors find it difficult to catch up in the short term. Through decades of technological accumulation, ASML has established barriers to entry, enabling it to maintain its leading position in the field of advanced lithography equipment.

Secondly, customer loyalty is strong and the cost of switching suppliers is high. Once a wafer fab has introduced lithography equipment, it requires long-term process validation, equipment commissioning and production optimisation; consequently, changing suppliers entails significant costs and production risks. Global advanced wafer fabs have developed a strong reliance on ASML’s equipment, ensuring a steady stream of long-term orders for the company.

Thirdly, advanced process technologies and demand for AI offer long-term growth potential. As sectors such as artificial intelligence and high-performance computing develop, demand for higher-performance chips is increasing, driving wafer fabs to expand their advanced process capacity and continue to procure EUV equipment. At the same time, future upgrades to High-NA EUV technology are expected to further extend ASML’s technology lifecycle.

It should be noted, however, that ASML’s profitability is not entirely immune to cyclical fluctuations. As equipment sales are highly correlated with foundries’ capital expenditure, short-term revenue may still be affected by the semiconductor cycle, the pace of client investment and changes in export policies. Consequently, the company’s profitability is characterised by ‘long-term technological growth combined with short-term cyclical fluctuations’.

Part Three: Position in the Supply Chain and Bargaining Power

3.1 Supply Chain Map

The semiconductor supply chain primarily comprises upstream semiconductor materials and equipment suppliers, the midstream chip manufacturing segment, and the downstream chip application sector. Within this framework, ASML is positioned in the upstream equipment segment of the semiconductor manufacturing supply chain, supplying lithography equipment to wafer fabs and serving as a key link between semiconductor equipment suppliers and chip manufacturers.

The upstream segment primarily comprises suppliers of materials, components and core technologies required for semiconductor manufacturing, such as photoresists, silicon wafers, light source systems, precision optical components, mechanical structures and control systems. ASML’s EUV lithography systems rely on a highly specialised global supply chain, encompassing key components such as high-precision optical systems, extreme ultraviolet light sources and precision motion control systems.

The midstream segment comprises wafer fabrication, which involves using processes such as lithography, etching, thin-film deposition and cleaning to pattern circuits onto wafers. ASML is a core equipment supplier in this segment, with lithography systems being among the most technically challenging and highest-value pieces of equipment in the chip manufacturing process. The company supports the mass production of advanced-process chips by supplying EUV and DUV lithography systems to wafer fabs.

The downstream sector primarily comprises chip design companies and end-user markets, such as artificial intelligence, high-performance computing, smartphones, automotive electronics and the Internet of Things. As demand for AI chips and high-performance computing grows, downstream demand for chips manufactured using advanced processes is increasing, further driving wafer fabs to expand their capital expenditure and boosting demand for ASML’s advanced lithography equipment.

3.2 Upstream and Downstream Structure

ASML occupies a central position in the semiconductor equipment supply chain. Whilst both its upstream and downstream sectors are highly concentrated, the company itself possesses strong technological barriers and the ability to integrate the supply chain.

With regard to downstream customers, ASML is characterised by “high customer concentration, but limited ability on the part of customers to substitute ASML”. In 2025, ASML’s largest customer contributed approximately €7.797 billion to total net sales, accounting for 23.9 per cent of total sales—a significant increase from 16.6 per cent in 2024; the top two customers combined accounted for 38.0 per cent of total net sales. The company explicitly states in its annual report that, due to ongoing consolidation in the semiconductor manufacturing industry, its sales remain concentrated among a limited number of large customers, and any significant change in the procurement behaviour of key customers could have a material impact on the company’s operating performance. (ASML Brand Portal; ASML 2025 Annual Report Based on US GAAP) Consequently, customer concentration represents a significant operational risk for ASML, and its revenue growth is, to a certain extent, influenced by the capital expenditure and capacity planning of major wafer fabs.

However, from the perspective of its position in the supply chain, customer concentration does not imply that ASML lacks bargaining power. ASML’s core advantage lies in the high degree of irreplaceability of its EUV lithography technology. EUV, which utilises a wavelength of 13.5 nanometres, is a key technology for the manufacture of advanced-process chips. ASML, in collaboration with its optical partner ZEISS, has jointly developed EUV systems, the optical components of which comprise mirrors made up of over 100 layers of precision materials. (ASML) For wafer fabs needing to build advanced process capacity, ASML equipment forms a vital foundation for achieving manufacturing at advanced nodes; consequently, whilst major customers are large in scale, they remain heavily reliant on suppliers for critical advanced lithography equipment.

Upstream, ASML exhibits a structure characterised by ‘a large number of suppliers, but a highly specialised critical supply chain’. In 2025, ASML had approximately 5,100 suppliers spread across the Netherlands, the rest of Europe, North America and Asia, with around 80 per cent of its bill of materials sourced from its global supplier network. ASML itself is primarily responsible for the core R&D, system design, integration and final delivery of lithography systems, whilst a large number of high-precision components and modules are supplied by specialised vendors. Consequently, ASML does not exercise complete control over the upstream supply chain, and there is a high degree of supplier concentration and difficulty in finding substitutes for certain key components.

Among these, ZEISS is one of the most representative strategic suppliers. In 2016, ASML acquired a 24.9 per cent stake in ZEISS subsidiary Carl Zeiss SMT for €1 billion in cash to kick-start the development of a new high-NA optical system for future-generation extreme ultraviolet (EUV) technology, and committed to supporting Carl Zeiss SMT’s research and development and capital expenditure with approximately €760 million over the following six years. ASML and ZEISS have a long-standing partnership in the development of EUV optical systems, with ZEISS supplying critical reflective optical systems for EUV equipment. As EUV optical systems demand extremely high precision and sophisticated manufacturing processes, it is difficult to find fully substitute suppliers in the short term; consequently, this aspect has effectively created a deep interdependence between ASML and its core suppliers.

In terms of bargaining power within the industrial chain, ASML occupies a rather unique position: whilst upstream suppliers exert a certain degree of influence over ASML, and large downstream wafer fabs possess considerable scale and capital strength, ASML itself wields strong core bargaining power thanks to its irreplaceable technology platform. With regard to upstream suppliers, ASML mitigates the risk of reliance on any single supplier through long-term partnerships, joint R&D, supplier collaboration and system integration; indeed, ASML has listed ‘Strengthening ecosystem relationships’ as a strategic priority for 2025 and continues to engage in joint R&D and quality management with its suppliers. As for downstream customers, ASML’s core equipment is directly linked to the capacity build-out for advanced processes, making it difficult for clients to simply reduce costs by switching suppliers when procuring critical equipment.

Consequently, ASML’s advantage within the industrial chain does not lie in a lack of concentration at either the upstream or downstream ends, but rather in the company’s position at a core node where its technological barriers are significantly higher than those of ordinary suppliers. Concentration among downstream customers exposes the company to the risk of fluctuations in customer capital expenditure; by 2025, its two largest customers had already accounted for 38.0 per cent of total sales. Upstream, the company is highly reliant on specialised suppliers, with approximately 80 per cent of its bill of materials sourced from external suppliers. At the same time, however, the high complexity of EUV technology, ASML’s system integration capabilities and its long-term partnerships with key suppliers enable the company to exert strong control over the supply chain across both upstream and downstream segments. Ultimately, this structure allows ASML to translate its technological advantages into high gross margins and long-term profitability; however, it also means that customer capital expenditure cycles and the supply capacity of key suppliers are two risk variables that require close monitoring in the future.

3.3 Substitutability Assessment

ASML occupies a central position in the semiconductor manufacturing supply chain as a core equipment provider and is not a run-of-the-mill supplier that can be easily replaced. Particularly in the field of advanced processes, ASML has established a near-monopoly market position through its EUV lithography technology and serves as a key infrastructure supplier enabling global wafer fabs to achieve mass production of advanced chips. Consequently, the company exhibits extremely low substitutability and high customer switching costs.

Secondly, the switching costs for ASML’s customers are extremely high. Once a wafer fab has procured lithography equipment, it cannot simply be installed and put into production; instead, it must undergo a lengthy process of equipment commissioning, process parameter optimisation and production line validation. As lithography equipment directly impacts chip yield and production efficiency, switching suppliers would require customers to readjust their production processes, potentially leading to a loss of production capacity and a decline in yield. Consequently, even if alternative suppliers exist, wafer fabs are unlikely to readily replace equipment systems that have been validated and proven to be mature.

Furthermore, ASML has established long-term partnerships with its customers. Leading global foundries typically plan their advanced process capacity years in advance and collaborate with ASML to drive the development of next-generation lithography technologies. This deep level of cooperation further enhances customer loyalty.

However, it should be noted that ASML is not entirely free from the risk of substitution. In the field of mature processes, DUV lithography equipment still faces competition from other manufacturers (such as Nikon and Canon); at the same time, should new chip manufacturing technology routes emerge in the future, this could reduce reliance on traditional lithography technology. Nevertheless, in the current advanced process sector, EUV remains an irreplaceable technology.

3.4 Profit-Generating Capacity

Within the semiconductor supply chain, profits typically concentrate in segments characterised by core technological barriers, scarce resources and strong bargaining power. Compared to segments such as wafer fabrication and packaging and testing, the semiconductor equipment sector—in which ASML operates—possesses a stronger capacity to generate profits; particularly in the field of advanced process lithography, the company is able to effectively convert industry growth into its own profits. Growth in the semiconductor industry is not distributed evenly amongst all participants in the supply chain, but tends to flow towards those segments that possess core technologies, scarce resources and strong bargaining power. For ASML, its core value stems not merely from the expansion of the semiconductor industry, but rather from the company’s ability to leverage the technological barriers of EUV lithography and its high irreplaceability in advanced processes to convert downstream chip demand growth into equipment orders, revenue and high levels of profit. Consequently, assessing ASML’s ability to capture profits requires a simultaneous examination of its position within the supply chain, the transmission of downstream capital expenditure, and its ultimate financial performance.

In 2025, as generative AI enters a period of explosive adoption, global data centres are experiencing an almost frenzied demand for computing power from logic chips and HBM (High Bandwidth Memory). A new wave of computing power demand, centred on AI training and data centre construction, is driving a recovery in investment related to advanced processes, whilst AI-driven applications are also fuelling demand for mature processes. Against this backdrop, chip manufacturing equipment—particularly lithography systems—can be regarded as one of the key indicators for gauging the quality and sustainability of this industrial recovery. In terms of profit distribution across the supply chain, value in the semiconductor industry is primarily concentrated in several key segments: upstream core equipment and materials, midstream wafer fabrication, and downstream chip design. Among these, chip design firms (such as high-end GPU and CPU designers) achieve higher profits through their brand, ecosystem and intellectual property; wafer fabrication firms generate stable returns through large-scale production; whilst core semiconductor equipment firms secure excess profits through technological monopolies and high barriers to entry.

In terms of the industry’s growth transmission mechanism, developments in fields such as AI and high-performance computing first drive growth in demand for advanced chips, which in turn prompts wafer fabs to increase capital expenditure on advanced processes, ultimately translating into demand for EUV equipment. Consequently, ASML is able to share in the value growth generated by the semiconductor industry’s upgrade, rather than being influenced solely by equipment procurement cycles.

In 2025, ASML achieved revenue of approximately €32.7 billion, representing an increase of approximately 15.6 per cent compared with the €28.3 billion recorded in 2024; During the same period, gross profit rose from approximately €14.5 billion to €17.3 billion, with the gross profit margin increasing from 51.3 per cent to 52.8 per cent; net profit grew from approximately €7.57 billion to approximately €9.61 billion, representing a year-on-year increase of approximately 26.9 per cent, whilst the net profit margin rose from approximately 26.8 per cent to approximately 29.4 per cent. It is worth noting that ASML’s net profit growth rate significantly outpaced its revenue growth rate, indicating that the company is not merely reaping higher sales revenue driven by industry growth, but is also able to convert new demand into shareholder profits at a higher margin. In other words, within the semiconductor supply chain, ASML is not only able to ‘share in the growth’, but also to ‘capture higher growth value’.

ASML possesses extremely strong technological barriers and a high degree of irreplaceability in the advanced lithography equipment market. When wafer fabs need to expand their advanced process capacity, EUV equipment is not merely a standard capital good, but rather a critical piece of equipment that determines advanced process production capacity, enabling ASML to translate its technological scarcity into higher equipment value and profit margins.

ASML’s order data further illustrates this market position. The company’s net bookings for 2025 reached approximately €28 billion, representing an increase of around 48.1 per cent compared to €18.9 billion in 2024, whilst the backlog as at the end of 2025 stood at approximately €38.8 billion. Although order growth does not necessarily imply that future revenue will increase by 48 per cent year-on-year—due to the time lag between order placement, production, delivery and revenue recognition—the substantial order volume and backlog indicate that customers continue to demonstrate strong demand for advanced lithography equipment, whilst also enhancing the visibility of the company’s future revenue. In particular, as capacity for advanced processes continues to expand, wafer fabs need to secure capacity for key equipment well in advance; this further demonstrates ASML’s strong market position and bargaining power in a context of supply scarcity.

From the perspective of capital efficiency and value creation within the industry chain, ASML also possesses certain structural advantages. Wafer fabrication companies need to invest tens of billions of US dollars in building fabs, whilst continuously upgrading equipment and expanding production capacity; consequently, their profit models are highly dependent on capital investment, capacity utilisation and chip prices. ASML, on the other hand, participates in fab capital expenditure primarily by providing high-tech key equipment and after-sales services, effectively sharing in the growth of the semiconductor industry by ‘selling the shovels’. As the complexity of advanced manufacturing processes continues to rise, wafer fabs are becoming increasingly reliant on state-of-the-art equipment, enabling ASML to capture a higher share of value from downstream capital expenditure growth. Consequently, ASML’s true competitive advantage lies not merely in the growth of the semiconductor equipment sector itself, but in its ability to occupy an irreplaceable position within the value chain.

However, ASML’s profit growth remains subject to certain constraints. On the one hand, the company’s client base consists primarily of a small number of major global wafer fabs, and the capital expenditure cycles of these clients influence the pace of equipment orders; on the other hand, certain suppliers of core components (such as those of high-end optical systems) possess strong bargaining power, limiting the scope for further profit growth. Nevertheless, overall, ASML’s pivotal position within the supply chain enables it to capture a higher share of value.

That said, ASML’s ability to generate profits is not entirely without constraints. Firstly, the company’s client base is highly concentrated amongst a small number of leading global wafer fabs; consequently, the capital expenditure cycles of these clients directly influence the pace of ASML’s equipment orders. When major clients postpone expansion plans for advanced processes, ASML’s short-term revenue and profits may still be affected, even if long-term demand for AI continues to grow. Secondly, whilst ASML possesses exceptionally strong technological bargaining power, its equipment relies heavily on a complex global supply chain, including high-end optical systems and other critical components. As some suppliers also face significant technological barriers, upstream costs and supply capacity may limit further improvements in the company’s profit margins. Finally, advanced semiconductor equipment is subject to global export control policies; ASML is not entirely free to sell its most advanced EUV equipment to all markets, and policy changes may affect the company’s potential market reach and order mix. Consequently, whilst ASML’s ability to generate profits is stronger than that of most participants in the semiconductor supply chain, it remains constrained by clients’ capital expenditure cycles, the supply chain and the policy environment.

Overall, growth in the semiconductor industry is not distributed evenly amongst all participants, but tends to flow towards those segments that control key technologies, scarce resources and possess strong bargaining power. Leveraging the technological barriers of EUV and its high irreplaceability in advanced manufacturing processes, ASML is able to convert the growth in chip demand driven by AI and high-performance computing into its own equipment orders and high-margin revenue through the industry chain transmission mechanism of ‘demand for advanced chips – foundry capital expenditure – demand for EUV equipment’. Consequently, ASML possesses a strong capacity to capture profits within the supply chain; its core advantage stems not merely from the high growth of the semiconductor industry, but from its technological monopoly, scarcity and irreplaceability in the advanced lithography segment, enabling the company to consistently command a higher share of value within the semiconductor supply chain.

3.5 Key Conclusion

Growth in the semiconductor industry is not distributed evenly amongst all participants, but tends to flow towards those segments that control key technologies and scarce resources. By virtue of its monopoly on EUV technology and its irreplaceable role in advanced manufacturing processes, ASML is able to convert growth in downstream chip demand into its own equipment orders and high-profit revenue, making it a company with strong profit-capture capabilities within the industry chain.

Part Four: Analysing the Authenticity of Competitive Advantages (Moats)

4.1 Sources of Barriers

ASML’s core barriers stem primarily from technology, customer certification and the supply chain ecosystem, with the systemic moat formed by EUV lithography technology being the most critical. Compared to ordinary equipment manufacturers, ASML’s advantage lies not in a single technological lead, but in a composite competitive advantage formed by long-term R&D investment, system integration capabilities, customer validation and supply chain synergy. Consequently, even if competitors were to overcome a single technical hurdle, it would be difficult for them to replicate ASML’s complete product and industrial ecosystem in the short term.

Technological barriers constitute ASML’s most fundamental moat. EUV lithography involves multiple fields, including extreme ultraviolet light sources, ultra-precision optics, wafer positioning, vacuum systems and software control, requiring long-term R&D and complex systems engineering capabilities. ASML remains the world’s sole company capable of commercialising EUV production. In 2025, the company’s R&D expenditure reached 4.7 billion euros, with over 16,000 R&D staff, and it continues to invest in technologies such as EUV, High-NA EUV and computational lithography. This demonstrates that ASML’s technological barriers do not stem from a single product advantage, but are built upon long-term R&D accumulation and interdisciplinary integration capabilities.

Customer certification and switching costs further reinforce this barrier. Lithography equipment is directly involved in the chip manufacturing process; following the introduction of new equipment, wafer fabs must carry out process validation, equipment commissioning and production line optimisation, whilst the performance of the equipment directly impacts yield and production stability. Consequently, even if competitors are able to develop similar equipment, they must undergo long-term validation in the actual production environment of advanced wafer fabs before they can truly enter large-scale mass production. ASML’s customer satisfaction survey score for 2025 reached 88 per cent, up from 86 per cent in 2024, reflecting the strong stability of its long-term technical services and customer relationships.

The supply chain ecosystem represents another barrier that is difficult to replicate. ASML does not produce all its core components independently, but relies on global suppliers to jointly develop and manufacture complex systems. In 2025, ASML had approximately 5,100 suppliers, of which around 900 were product-related suppliers; approximately 80 per cent of the company’s material costs were sourced from external suppliers. This model implies that competitors must replicate not only ASML’s own technology, but also its long-standing supplier relationships, joint R&D capabilities and complex system integration framework. The long-term collaboration and joint R&D between ASML and its suppliers mean that the supply chain itself has become a competitive barrier.

By contrast, cost advantages and brand reputation are not ASML’s core barriers. The company does not compete on the basis of low costs, but rather derives its pricing power from the irreplaceability of its technology; its brand reputation stems largely from its long-standing technological leadership and customer trust.

Furthermore, long-term engineering experience and large-scale application have created tacit knowledge barriers. Lithography equipment requires continuous debugging, upgrading and optimisation in real production environments; through long-term collaboration with wafer fabs and suppliers, ASML has steadily accumulated expertise in equipment performance, process optimisation and system integration. Such experience is difficult to replicate directly through the purchase of equipment, the recruitment of talent or a short-term increase in R&D investment, and is therefore characterised by strong path dependence.

By contrast, cost advantages, brand reputation and distribution channels are not ASML’s most fundamental barriers. ASML does not derive its competitive advantage from low-cost production; its core value lies in technological complexity and the irreplaceability of its equipment. Its brand reputation is largely the result of long-term technological leadership, reliability and accumulated customer trust, rather than an independent barrier to entry. For highly specialised semiconductor equipment, the importance of brand and distribution channels—as seen in traditional consumer industries—is also relatively limited.

4.2 Key Conclusions

Consequently, ASML’s true moat can be summarised as ‘technological complexity + customer validation + supply chain ecosystem + long-term engineering expertise’. These barriers are not independent of one another but reinforce each other: technological advantages attract customer validation; customer applications further accumulate engineering expertise; and long-term collaboration drives joint R&D within the supply chain, ultimately forming an ecosystem that competitors find difficult to replicate in its entirety. Compared to mere brand or cost advantages, these systemic barriers are far more difficult to replicate and are the core reason why ASML has been able to maintain its leading position in the advanced lithography sector over the long term.

4.3 Validation Criteria

ASML’s competitive advantage has been validated through market share, profitability, customer loyalty and the quality of its cash flow, rather than remaining merely at the level of technical claims. A true moat should be capable of translating into sustained commercial results, and ASML currently demonstrates strong competitiveness across multiple metrics.

(1) Gross Margin: Technological Barriers Translated into Pricing Power

ASML has maintained a high gross margin over the long term, reflecting its technological advantages and product scarcity. In 2025, the company’s gross margin reached 52.8 per cent, with gross profit amounting to €17.26 billion. Maintaining a gross margin exceeding 50 per cent within the equipment manufacturing sector demonstrates that ASML does not rely on low-cost competition, but rather derives strong pricing power from the scarcity of EUV technology and the irreplaceable nature of its products.

(2) Customer loyalty: Customer satisfaction translates into long-term partnerships

ASML’s customer base is primarily comprised of the world’s leading wafer fabs; as its equipment requires long-term validation and integration into customers’ production processes, customer relationships are characterised by a high degree of stability. In 2025, ASML’s customer satisfaction reached 88 per cent, a further increase from 86 per cent in 2024, demonstrating that its technology, equipment reliability and service capabilities have been recognised by customers. Compared to mere customer numbers, sustained customer satisfaction and long-term partnerships are a stronger testament to its customer loyalty.

(3) Market Share: Establishing a Monopoly in the EUV Sector

ASML’s technological barriers are most evident in the EUV sector. Currently, ASML is the only company globally to have achieved commercial-scale mass production of EUV lithography systems, creating extremely high barriers to market entry. In 2025, the company sold a total of 535 systems, including 48 EUV systems. The high degree of concentration in the EUV sector indicates that its technological barriers have translated into actual market position, rather than remaining merely at the level of R&D advantages.

(4) Cash Flow and Cyclical Resilience: Service Business Enhances Stability

The semiconductor equipment industry is characterised by marked cyclicality; however, by developing its service business through a vast installed base of equipment, ASML is able to reduce its reliance on the sales cycle for new equipment. In 2025, the company’s revenue from services and on-site upgrades reached €8.19 billion, representing a year-on-year increase of 26.2 per cent, which significantly outpaced the growth in overall system sales. As the installed base continues to grow, demand for services, upgrades and maintenance is also expanding, enabling ASML to generate more stable and sustainable revenue and providing a certain degree of cushion during downturns in the equipment investment cycle.

4.4 Core Conclusions

ASML’s core advantage over its peers lies in its ability to translate ‘technological leadership’ into ‘commercial monopoly’. The technological barriers associated with EUV ensure high profit margins, whilst customer certification and the supply chain ecosystem guarantee long-term competitive advantage; meanwhile, the growth in service business and demand for advanced processes enhances profitability stability. Consequently, ASML possesses stronger profit-generating capacity, sustainability and resilience to economic cycles than typical semiconductor equipment manufacturers.

Taken together, ASML’s competitive advantage extends beyond mere technological leadership; it has established a systematic moat capable of continuously generating commercial value. Technological barriers and the high concentration in the EUV sector grant the company strong pricing power; customer certification, the supply chain ecosystem and long-term technological accumulation make it difficult for competitors to replicate its success; whilst the vast installed base of equipment and the services business enhance the sustainability of its revenue.

Consequently, ASML’s advantages can be summarised as follows: technological barriers ensure it ‘earns more’; a multifaceted moat ensures it ‘earns for longer’; whilst its service business and installed base help it ‘earn more steadily’. Judging by actual operational metrics such as gross profit margin, customer loyalty, market position and service revenue, these advantages have been commercially validated; ASML’s competitive edge constitutes a genuine and highly sustainable moat, rather than a mere technological concept or market narrative.

Part V: Growth Drivers and Profit Quality

5.1 Breakdown of Growth Sources

ASML’s growth in recent years has not simply stemmed from an overall recovery in the semiconductor industry, but has exhibited distinct characteristics of structural growth. In 2025, the company’s system sales volume fell from 583 units in 2024 to 535 units, yet revenue still grew by 15.6 per cent. This indicates that growth was not primarily driven by an increase in equipment sales volume, but rather by product mix upgrades and a higher proportion of high-value equipment.

In terms of product mix, EUV is one of the most significant sources of growth. In 2025, sales of EUV systems reached €11.6bn, representing a year-on-year increase of 39 per cent, whilst sales of DUV systems stood at €12.0bn, a year-on-year decrease of 6 per cent. Meanwhile, sales of Metrology & Inspection systems grew by 28 per cent to €825m. This indicates that ASML’s growth is concentrating on more advanced, higher-value products, rather than relying on the expansion of traditional equipment sales.

From the perspective of end markets, growth has also shown marked divergence. In 2025, revenue from logic-related systems reached €16.1bn, representing a year-on-year increase of 22 per cent, whilst revenue from memory-related systems stood at €8.4bn, a year-on-year decrease of 2 per cent. The growth in logic systems was primarily driven by demand for advanced processes and AI-related applications, indicating that ASML’s current growth is concentrated in the high-end computing and advanced process sectors, rather than across the entire semiconductor market.

Furthermore, the ramp-up of new products represents a potential source of growth in the next phase. In 2025, ASML completed customer acceptance of its first High-NA EUV EXE:5200B system and recognised revenue from it, whilst the first XT:260 advanced packaging product was also shipped. As these new products gradually enter customers’ production processes, future growth is expected to expand further from upgrades to existing products to the penetration of new products.

Consequently, ASML’s current growth drivers can be summarised as follows: product mix upgrading is central; demand for advanced logic serves as the primary market support; whilst new products such as High-NA EUV and advanced packaging provide scope for further growth in the next phase. Compared to relying solely on volume growth, this growth model—‘selling fewer systems, but higher-value systems’—better reflects the structural characteristics of ASML’s growth.

5.2 Assessment of Growth Sustainability

The sustainability of ASML’s future growth stems primarily from structural demand, the delivery of new products and order visibility, rather than relying solely on short-term cycles in the semiconductor industry. Although semiconductor capital expenditure remains cyclical, AI, high-performance computing and advanced process upgrades are forming a relatively long-term demand base, enabling ASML’s growth foundation to gradually shift from traditional cyclical recovery towards structural growth.

Firstly, industry demand is underpinned by certain long-term factors. The development of AI servers and high-performance computing is driving growth in demand for advanced logic chips and high-end memory, which in turn is fuelling investment in advanced process technologies by wafer fabs. Compared to traditional consumer electronics cycles, AI-related capital expenditure is driven more by the development of computing infrastructure; consequently, its demand cycle may exhibit stronger structural characteristics. However, capital expenditure by wafer fabs will still be influenced by macroeconomic conditions, inventory cycles and the pace of client investment; therefore, ASML’s short-term revenue growth may still experience fluctuations.

Secondly, ASML’s future growth does not primarily depend on increasing market share, but rather on the expansion of the high-end lithography market itself. In the EUV sector, ASML already enjoys extremely high market concentration; consequently, future growth potential stems more from the continuous upgrading of advanced processes and the broadening scope of EUV applications, rather than from capturing significant market share from competitors. This implies that ASML’s growth logic is closer to “growing in tandem with the expansion of new demand”, rather than the traditional battle for market share seen in manufacturing.

Thirdly, High-NA EUV has begun to enter the commercialisation phase. ASML has already recognised revenue from High-NA EUV-related equipment for 2025, indicating that the technology is moving from the R&D and customer validation stages into actual commercialisation. As advanced processes continue to evolve, High-NA EUV is expected to become a key driver of product growth in the next phase. Consequently, compared to relying solely on demand for existing EUV equipment, the gradual ramp-up of High-NA production provides ASML with a new growth trajectory.

Furthermore, the order backlog has enhanced visibility regarding future revenue. As at the end of 2025, ASML’s order backlog stood at approximately €38.8bn, providing a degree of assurance for future equipment revenue. However, the order backlog is not equivalent to realised revenue; actual recognition remains dependent on customer deliveries and capital expenditure plans. Consequently, it is more appropriately viewed as an indicator of growth visibility rather than guaranteed revenue.

Overall, the sustainability of ASML’s growth is primarily underpinned by ‘structural demand + expansion in high-end markets + delivery of new products + order visibility’. Whilst industry cycles will continue to cause short-term volatility, AI and upgrades to advanced manufacturing processes provide a foundation for medium- to long-term demand, whilst High-NA EUV offers new product support for the next phase of growth. Consequently, compared to equipment manufacturers that rely solely on the semiconductor cycle, ASML’s future growth exhibits a stronger structural foundation; however, continued monitoring of AI capital expenditure, the pace of High-NA volume ramp-up, and the realisation of customer investment plans remains necessary.

5.3 Analysis of Profit Quality

In terms of profit quality, the company’s revenue growth has already been clearly reflected in its profit figures. In 2025, ASML’s operating revenue is projected to grow by approximately 15.6 per cent year-on-year, whilst net profit is expected to increase by around 27 per cent—significantly outpacing revenue growth. Concurrently, the company’s gross margin is set to rise from 51.3 per cent in 2024 to 52.8 per cent in 2025, indicating that revenue growth stems not only from increased equipment sales but is also accompanied by improvements in product mix and profitability. High-end equipment such as EUV inherently possesses higher technological value-added; as the proportion of EUV revenue increases, the company’s overall product mix is optimised. At the same time, the ever-expanding equipment installation and maintenance business generates relatively stable and sustainable service revenue. Consequently, ASML’s current profit improvement is not primarily driven by simple cost-cutting or reductions in R&D expenditure, but rather stems from an increased share of high-end products, growth in the services business, and economies of scale. This is a crucial factor in assessing profit quality. In 2025, the company’s R&D expenditure remained at approximately €4.7bn, maintaining a high level. This indicates that the company has not sacrificed short-term profit growth by reducing investment in technological research and development, but has instead achieved improved profitability whilst continuing to invest in next-generation technologies such as EUV and High NA EUV. Consequently, compared to profit growth achieved solely through cost-cutting, ASML’s current profit growth is of higher quality and more sustainable.

In terms of profit quality, ASML’s revenue growth in 2025 has translated effectively into profit growth. The company’s operating revenue increased by approximately 15.6 per cent year-on-year, whilst net profit rose by approximately 27 per cent, significantly outpacing revenue growth; simultaneously, the gross margin improved from 51.3 per cent in 2024 to 52.8 per cent. This indicates that the company has not only achieved revenue growth but has also improved its profitability, with growth not merely dependent on expanding sales volume.

The improvement in profit margins is linked to optimisation of the product mix and economies of scale. As the proportion of high-value EUV products has increased, the company’s overall product portfolio has improved, enabling revenue to be converted into higher gross profit. At the same time, as the scale of operations expands, certain R&D and operational costs can be spread across a larger revenue base, which also contributes to higher profit margins. Consequently, ASML’s profit growth does not rely primarily on one-off cost reductions but exhibits certain characteristics of operating leverage.

More importantly, whether profit growth can be converted into cash is key to assessing the quality of those profits. ASML’s business model does not fall under the category of manufacturing models that rely heavily on continuous, large-scale capital investment to sustain revenue; the company’s core value derives primarily from R&D, technology and systems integration. Consequently, whilst maintaining a high level of R&D expenditure，it maintains good cash flow，This indicates that its profits have a strong ability to generate cash. In 2025, the company’s R&D expenditure stood at approximately €4.7bn, remaining at a high level, which also demonstrates that the improvement in profits is not a short-term result achieved by cutting R&D expenditure.

Consequently, ASML’s current profit growth is of high quality: revenue growth is accompanied by an improvement in gross margin, profit growth outpaces revenue growth, whilst the company continues to maintain substantial R&D expenditure and possesses strong cash generation capabilities. This implies that growth is not merely reflected on the profit and loss account, but is largely converted into cash actually available to the company and long-term investment capacity.

5.4 Signs of a Key Inflection Point

In terms of signs of a key inflection point, ASML has already exhibited several positive developments. Firstly, the growth rate of EUV revenue is significantly higher than that of the company’s overall revenue, indicating that high-end products are becoming the primary source of growth and that the trend towards optimising the product mix is now quite clear; Secondly, High NA EUV is beginning to enter the revenue recognition phase, signifying that new products are gradually transitioning from technological R&D to commercialisation, and are expected to become a new source of growth in the coming years; furthermore, revenue from equipment installation and maintenance services has maintained rapid growth, indicating that the company is expanding beyond one-off equipment sales to encompass services across the entire equipment lifecycle, thereby enhancing revenue stability; in addition, gross margins have resumed an upward trend, and net profit growth has outpaced revenue growth, demonstrating that scale expansion is beginning to reflect the effects of operating leverage and improvements in product mix. At the same time, substantial R&D expenditure and a steadily growing order backlog also indicate that the company is not sacrificing future growth in pursuit of short-term profits. Taken together, ASML has now gradually transitioned from a phase characterised solely by a ‘recovery in demand for semiconductor equipment’ to a growth phase driven by ‘AI demand, advanced process upgrades, optimisation of the EUV product mix, growth in service revenue and the delivery of new High NA products’, with both the certainty of revenue growth and the quality of profits having improved. However, its future performance will still require ongoing monitoring of whether AI capital expenditure can be sustained, the pace of capacity expansion for advanced processes by major customers, and changes in export controls; these factors will determine whether the current high growth can truly translate into sustained growth over the medium to long term.

Judging by key inflection point indicators, ASML has already shown some positive developments. Firstly, profitability is improving, with net profit growth outpacing revenue growth, indicating that the company is beginning to demonstrate a degree of operating leverage, and that growth is gradually translating into higher profits. However, whether this improvement can be sustained will depend on changes in profit margins over the coming quarters.

Secondly, cash flow is a key indicator for assessing the quality of this round of growth. If operating cash flow and free cash flow continue to keep pace with profit growth, this suggests that revenue and profits can ultimately be converted into actual cash, rather than remaining merely as growth on the books. Therefore, changes in cash flow should serve as a key metric for assessing the quality of ASML’s future performance.

Furthermore, the commercialisation of new products and the fulfilment of orders also serve as important indicators of a turning point. High-NA EUV has already entered the commercialisation phase, but whether it can generate revenue on a large scale in the future remains to be seen, depending on the pace of customer adoption and the actual order situation. At the same time, the company continues to maintain a high level of R&D expenditure, indicating that it has not sacrificed long-term technological investment in pursuit of short-term profits.

Consequently, ASML is currently best characterised as being in a phase of transition from cyclical recovery to structural growth. Positive signals, such as improved profitability and the commercialisation of new products, are already evident at this stage; however, whether the company can truly enter a phase of sustained growth in the future will depend on close monitoring of free cash flow, the ramp-up of High-NA production, and the realisation of customer capital expenditure.

Part Six: Verification of Financial Statements

6.1 Income Statement

In terms of changes in profit margins, ASML’s gross profit margin declined in 2022 but subsequently recovered gradually, reaching 52.8 per cent in 2025—an increase of 1.5 percentage points from 51.3 per cent in 2024; The net profit margin also rebounded from approximately 26.8 per cent in 2024 to 29.4 per cent in 2025. This indicates that the improvement in profitability in 2025 stemmed not only from an expansion in revenue but was also reflected in a recovery in overall profit margins.

From the cost perspective, the company continues to maintain a high level of investment in research and development. In 2025, R&D expenditure amounted to approximately €4.7bn, accounting for around 14 per cent of revenue, indicating that profit growth is not primarily driven by cuts to R&D expenditure. On the contrary, the company has achieved improvements in both gross and net profit margins whilst maintaining a high level of investment in technology, suggesting that the improvement in profitability is of a higher quality.

Overall, ASML’s 2025 income statement exhibits a distinct pattern of ‘revenue growth + margin improvement + accelerating net profit’. Combined with the analysis above, this suggests that the company’s growth is no longer merely reflected in expanding sales volumes, but is also beginning to manifest as greater efficiency in converting revenue into profit. However, profit margins between 2021 and 2025 are still subject to cyclical fluctuations; therefore, the improvement in profit margins in 2025 cannot simply be regarded as a long-term trend. Its sustainability will need to be further verified by analysing cash flows and the balance sheet.

6.2 Balance Sheet

Looking at the balance sheet, ASML’s total assets in 2025 are estimated at approximately €50.6bn, representing an increase of around 4.1 per cent compared with 2024. This is significantly lower than the 15.6 per cent revenue growth rate over the same period, indicating that the company has not experienced a corresponding expansion in asset size whilst increasing its revenue.

Firstly, the decline in trade receivables is a relatively positive sign. ASML’s net trade receivables stood at approximately €4.48bn in 2024, falling to €3.02bn in 2025. The fact that trade receivables have decreased whilst revenue has grown suggests that the company’s revenue growth has not relied significantly on relaxed credit terms, and that pressure on cash collection remains generally manageable.

Secondly, inventories are the item on the balance sheet warranting the most attention. The company’s inventories rose from approximately €10.89bn in 2024 to €11.43bn in 2025, an increase of around 4.9 per cent, which is lower than the 15.6 per cent growth rate in revenue. Therefore, although inventory levels continue to expand, there has been no significant deterioration relative to the scale of the business. Given the long production cycle and complex components of ASML’s equipment, a relatively high level of inventory is to some extent justifiable; however, should customer capital expenditure slow whilst inventory continues to rise rapidly, this could place pressure on cash flow.

Furthermore, property, plant and equipment (PP&E) continued to grow, rising from approximately €6.85bn in 2024 to €7.89bn in 2025, representing a year-on-year increase of approximately 15.3 per cent. This indicates that the company is continuing to invest in production, research and development, and infrastructure to provide production capacity to support future business expansion, rather than relying solely on existing assets to drive revenue growth.

Contract liabilities are also worthy of attention. In 2025, current and non-current contract liabilities totalled approximately €19.4bn, up from approximately €18.2bn in 2024. Higher contract liabilities indicate that the company has received advance payments or contractual commitments from customers, providing a degree of visibility regarding future equipment deliveries and revenue recognition.

Finally, goodwill has remained largely stable, standing at approximately €4.6bn in both 2024 and 2025, indicating that the company’s recent growth has not been primarily driven by large-scale mergers and acquisitions, but rather by organic business expansion and capacity building.

Overall, ASML’s balance sheet for 2025 is generally sound. Revenue growth has not led to significant pressure on trade receivables; inventory growth has lagged behind revenue growth; contract liabilities have remained at a high level; and the company has continued to increase its investment in fixed assets. The only area requiring ongoing attention is the level of inventory; should industry capital expenditure slow in the future, inventory could become a significant source of pressure on cash flow.

6.3 Cash Flow Statement

From the cash flow statement, ASML demonstrates strong overall cash generation capacity, although operating cash flow exhibits a certain degree of cyclicality. Both metrics declined significantly in 2023 but subsequently recovered rapidly in 2024–2025.

The decline in cash flow in 2023 does not indicate a sudden deterioration in the company’s profitability, but is primarily attributable to an increase in working capital requirements. In 2023, ASML still achieved revenue of approximately €27.6bn and a net profit of €7.8bn, with a gross margin of 51.3 per cent; however, cash flow from operating activities amounted to only €5.44bn. The company was affected that year by changes in inventory, trade receivables and other working capital items, which resulted in a portion of its profits being temporarily tied up in working capital. ASML subsequently disclosed that operating cash flow increased by €5.83bn in 2024, primarily due to higher customer prepayments and improved timing of payments to suppliers.

Consequently, the decline in cash flow in 2023 should be understood as a temporary deterioration in the cash conversion cycle rather than a fundamental issue with the quality of profits. This is also corroborated by subsequent data: in 2024, operating cash flow rebounded rapidly to €11.17bn, rising further to €12.66bn in 2025, both figures exceeding net profit for the respective periods.

In 2025, the company’s net profit stood at €9.61bn, whilst operating cash flow reached €12.66bn and free cash flow amounted to €11.03bn. In other words, operating cash flow was approximately 1.32 times net profit, and free cash flow was approximately 1.15 times net profit, indicating that the company’s reported profits are being converted into actual cash to a considerable extent. At the same time, the company will continue to maintain a high level of R&D expenditure in 2025, suggesting that the improvement in cash flow is not simply achieved by cutting long-term investments.

Overall, ASML’s cash flows exhibit a certain degree of cyclicality; however, the marked decline in 2023 was swiftly followed by a recovery, indicating that there has been no structural deterioration in its cash-generating capacity. In 2025, both operating cash flow and free cash flow exceeded net profit, further confirming that the company’s earnings are strongly underpinned by cash flow.

6.4 ROE Breakdown (DuPont Analysis)

Judging by the changes from 2021 to 2025, ASML’s high ROE is primarily driven by a high net profit margin rather than reliance on high leverage. In 2025, the company’s net profit stood at approximately €9.6bn, with a net profit margin of around 29.4 per cent, reflecting strong profitability; at the same time, the company’s total assets amounted to approximately €50.6bn, with relatively restrained growth in asset size, indicating that the company is able to generate high profits using a limited asset base.

In terms of asset turnover, ASML is a high-tech, R&D-intensive equipment manufacturer with relatively long production cycles; consequently, asset turnover is not one of its core strengths. In 2025, the company’s revenue is projected to be approximately €32.7bn, corresponding to total assets of approximately €50.6bn, resulting in an asset turnover ratio of approximately 0.65 times. This implies that ASML does not rely on a ‘low-margin, high-volume, rapid turnover’ model to achieve a high ROE, but rather realises a return on capital through high unit product value and profit margins.

By contrast, financial leverage is not the primary source of ASML’s high ROE. In 2025, the company’s debt-to-equity ratio remained at a relatively manageable level, with an equity multiplier of approximately 1.7 times. This indicates that, whilst the company utilises a certain degree of debt, it does not rely on aggressive leverage to amplify shareholder returns. Consequently, the quality of its ROE is relatively high: even when excluding the impact of leverage, the company is still able to generate a favourable return on capital through its high net profit margin.

Overall, ASML’s ROE structure exhibits distinct characteristics of being ‘driven by high profit margins’, rather than following a ‘high turnover plus high leverage’ model. This is highly consistent with its business model: the company achieves high gross margins through technological barriers and product scarcity, which are then converted into shareholder returns via high profit margins. Consequently, ASML’s high ROE stems more from genuine operational competitiveness than from financial leverage.

6.5 Mutually Reinforcing Logic

The industry analysis presented earlier suggests that ASML’s growth stems primarily from upgrades to advanced manufacturing processes, rising demand for EUV technology, and an increasing share of high-end products. From a financial perspective, this logic has been partially validated. The company’s gross profit margin rebounded to 52.8 per cent in 2025, indicating that growth in high-end products not only generates revenue but also translates into enhanced profitability.

At the same time, as the installed base of equipment expands, the service and upgrade business continues to grow, indicating that past equipment sales are being further converted into recurring revenue, thereby enhancing the sustainability of the business.

Looking at the balance sheet and cash flows, inventory growth in 2025 was lower than revenue growth, and there was no significant deterioration in trade receivables; operating cash flow reached €12.66bn and free cash flow reached €11.03bn, both exceeding the net profit of €9.61bn, indicating that revenue and profits are ultimately being effectively converted into cash.

Consequently, ASML’s business logic and financial performance are largely mutually reinforcing: advanced process upgrades drive demand for EUV, high-end products underpin profitability, the installed base of equipment drives service revenue, whilst strong cash flow validates the company’s ability to deliver on its growth potential. However, the company remains subject to factors such as customers’ capital expenditure cycles, payment schedules and export controls; therefore, changes in order intake, gross margins and cash flow will need to be monitored closely in the future.

Part 7: Management and Corporate Governance

7.1 Historical Performance of Management

ASML’s management has, on the whole, demonstrated a strong long-term orientation in its historical decision-making. Rather than drastically cutting R&D expenditure in response to cyclical fluctuations in the semiconductor industry, the company has continued to invest in technologies such as EUV and next-generation High NA EUV, whilst proactively addressing future demand through supply chain investments and capacity expansion. Although this strategy increases short-term costs, it is well-suited to ASML’s business model, characterised by long technology iteration cycles and lengthy customer validation periods.

During industry downturns, the company has not engaged in blind diversification but has instead continued to deepen its capabilities in core businesses such as lithography, software and services. In 2025, ASML’s management and supervisory board will continue to prioritise cost control, order delivery times and supply chain flexibility, whilst preparing in advance for the next round of industry growth, demonstrating a strong awareness of cyclical management.

Furthermore, ASML’s capital allocation has been relatively restrained. The company continues to invest in research and development and production capacity, whilst returning cash to shareholders through dividends and share buybacks, rather than relying on large-scale mergers and acquisitions to expand its scale. For 2025, the company has proposed an annual dividend of €7.50 per share and will launch a new share buyback programme for the period 2026–2028 in 2026.

7.2 Governance Structure

ASML adopts a Dutch two-tier governance structure, with the Board of Management responsible for day-to-day operations and the Supervisory Board overseeing its activities. In 2025, the Supervisory Board focused its scrutiny on financial reporting, executive remuneration, capital return policy, share buybacks and the implementation of corporate strategy; the governance system is relatively well-established.

In terms of shareholder returns, the company employs a combination of cash dividends and share buy-backs for capital distribution, rather than simply pursuing the expansion of its asset base. A consistent shareholder return policy helps to mitigate, to a certain extent, the risk of management retaining excessive cash or making low-return investments.

7.3 Assessment of Governance Premium/Discount

Overall, ASML’s corporate governance is closer to neutral with a positive bias. Management has long maintained a commitment to investment in R&D and core business operations, whilst exercising restraint in capital allocation. Furthermore, the company possesses relatively robust supervisory board oversight and shareholder return mechanisms; consequently, there is no apparent governance discount.

However, it should be noted that ASML is highly dependent on a small number of major clients and faces complex decision-making challenges regarding export controls, supply chains and technological investment. Therefore, whether management can continue to balance long-term R&D investment, capital returns and cyclical management in the future remains a key factor influencing the company’s long-term value.

Part 8: Valuation and Forecast Analysis

8.1 Choice of Valuation Methodology

For ASML, the price-to-earnings (PE) ratio is the most appropriate core valuation metric. The company has established mature and stable profitability, with net profit expected to reach approximately €9.6bn in 2025 and free cash flow of approximately €11.0bn; consequently, there is no risk of PE distortion caused by negative profits or poor earnings quality. By contrast, the price-to-book (PB) ratio is more suitable for asset-driven enterprises such as banks and insurers, whilst ASML’s core value derives primarily from its technology, R&D capabilities and monopoly position in EUV. As its book assets fail to reflect its true competitive advantages, the PB ratio is of limited relevance.

PS can be used to gauge the market’s valuation of the company’s revenue, but fails to reflect ASML’s advantage of a gross margin exceeding 50 per cent; PCF, whilst reflecting cash generation capacity, is influenced by customer prepayments and working capital cycles. Consequently, this report primarily uses PE, with PS and FCF serving as supplementary indicators. · Current valuation levels: historical percentiles and peer comparisons

Valuation Implied Expectations

As at 14 August 2026, ASML’s TTM P/E stood at 57.41 times, with a high of 64.33 times and a low of 27.81 times over the past year. In other words, the current valuation is clearly approaching the high point of the past year and is situated near the upper end of the valuation range for that period. At the same time, ASML’s P/E ratio has risen by approximately 98 per cent over the past 365 days, indicating that the recent rise in the share price has outpaced earnings growth over the past year.

This valuation level indicates that the market has already assigned ASML a substantial growth premium. Investors are not merely pricing in the company’s current profitability, but are anticipating future profit growth driven by demand for AI computing power, upgrades to advanced manufacturing processes, and the contributions of EUV and High NA EUV technologies.

From a fundamental perspective, this premium is to some extent justified. ASML is projected to achieve revenue of €32.7bn and net profit of €9.6bn in 2025, with a gross margin of 52.8 per cent; meanwhile, its order backlog at year-end is expected to reach €38.8bn. Consequently, ASML’s high P/E ratio is not solely driven by market sentiment, but is underpinned by strong profitability and visibility on future orders.

However, it should be noted that a P/E ratio of 57.41 implies a relatively low margin for error in terms of valuation. If future EPS growth fails to meet market expectations, even if the company’s fundamentals continue to improve, a decline in the P/E ratio could offset some of the share price gains driven by earnings growth.

Furthermore, at this valuation level, the market is clearly not pricing ASML as a mature, low-growth equipment manufacturer, but has already factored in rapid future earnings growth in advance. The key expectations are as follows:

Firstly, the market expects revenue to continue growing at a rapid pace.

ASML’s revenue for 2025 is projected at €32.7bn, representing year-on-year growth of 15.6%; whilst in the second quarter of 2026, the company further raised its full-year revenue guidance to €43–45bn, corresponding to year-on-year growth of approximately 31%–38%. This suggests that the market is pricing in the continued flow of AI capital expenditure and investment in advanced processes towards ASML, rather than viewing the 2025 growth as merely a one-off cyclical rebound.

Secondly, the market expects profit growth to outpace revenue growth.

In the second quarter of 2026, ASML’s gross margin reached 54.0 per cent, and the company’s full-year gross margin guidance stands at 54 per cent–56 per cent, higher than the 52.8 per cent recorded in 2025. If the proportion of high-end EUV products continues to rise, the improvement in margins will further drive EPS growth, thereby helping to justify the current high P/E ratio.

Thirdly, the market expects this high growth to be sustainable, rather than limited to a single year.

In 2025, ASML confirmed revenue opportunities of approximately €44–60bn and a gross margin of approximately 56%–60% for 2030, indicating that the company’s own long-term targets are significantly higher than its current scale. Meanwhile, order intake remained strong in the first half of 2026, and the company even plans to increase future EUV production capacity to meet customer demand.

Consequently, what the 57.41x P/E ratio truly implies is not ‘whether ASML can make a profit this year’, but rather the market’s belief that ASML will be able to sustain high EPS growth over the coming years, without a significant decline in profit margins.

8.2 Identifying Discrepancies in Expectations

Firstly, the impact of AI capital expenditure on ASML may be stronger and more enduring than the market anticipates. In Q2 2026, ASML achieved net sales of €9.3bn and a net profit of €2.9bn, and raised its full-year revenue guidance to €43–45bn, whilst increasing its gross margin guidance to 54%–56%. The company’s management stated that both Logic and DRAM customers are accelerating their capital expenditure plans.

Secondly, the Installed Base business may prove to be an underestimated source of growth. In Q2 2026, revenue from this business reached €2.8bn, approximately €0.3bn higher than the company’s previous guidance, driven primarily by demand for upgrades, and it boasts a high gross margin. This suggests that ASML’s future growth will not rely entirely on sales of new equipment.

On the other hand, a price-to-earnings (P/E) ratio of 57.41 already reflects high growth expectations. Should AI-related capital expenditure slow down, or should wafer fabs delay capacity expansion, ASML’s order and revenue growth rates may decline; in such a scenario, even if the company’s profits continue to grow, a compression in the P/E ratio could affect the share price.

Furthermore, ASML’s future growth remains constrained by customer concentration and export controls. Consequently, if the market equates AI demand directly with ASML’s sustained high-growth revenue, it may be overestimating the certainty of this impact being passed through the supply chain.

8.3 Early Indicators

At present, the latest data generally tends to validate optimistic expectations: Q2 revenue exceeded the upper end of guidance, gross margin reached 54 per cent, the Installed Base business outperformed expectations, and the company has significantly raised its full-year revenue guidance from the previous €36–40bn to €43–45bn.

8.4 Conclusion

Overall, ASML is currently a company characterised by strong fundamentals, a high valuation and high market expectations. As demonstrated earlier, the company’s future growth remains underpinned by a robust industrial foundation; however, the current share price has already factored in a significant portion of the growth expectations driven by AI, EUV and advanced process upgrades.

Consequently, whether ASML has further scope for revaluation in the future depends not on whether its valuation can continue to rely on P/E expansion, but rather on whether actual profit growth can consistently exceed market expectations. If future orders, product upgrades and profit margins continue to exceed expectations, the company can gradually absorb the high valuation through EPS growth; conversely, if industry capital expenditure slows, the high valuation will amplify the risk of a share price correction.

Therefore, ASML is currently best understood as a ‘high-quality but high-expectation’ company: its fundamentals remain attractive, but the margin of safety in its valuation is now limited. Future investment returns will depend more on the realisation of earnings growth rather than solely on further increases in valuation multiples.

Part 9: Risk and Valuation Assessment

9.1 Risk Classification

The risks currently facing ASML can be broadly categorised into three types: priced-in risks, unpriced risks and short-term disruptions.

Priced-in risks primarily include cyclical fluctuations in the semiconductor industry, changes in customer capital expenditure and high valuations. These risks have been widely recognised by the market and are therefore, to a certain extent, already reflected in the current share price. As long as demand for AI and advanced processes continues to grow, such factors will manifest more as temporary fluctuations in orders and earnings, and will not necessarily alter ASML’s long-term competitive advantage.

Unpriced risks, on the other hand, stem primarily from AI capital expenditure remaining persistently below expectations, further tightening of export controls, and the commercialisation of High NA EUV falling behind schedule. Should investment in AI infrastructure slow significantly, major clients may postpone their plans to expand advanced process capacity, directly impacting ASML’s future order and revenue growth; whilst a further expansion of export controls could constrain the company’s potential market reach. Given that current valuations are already high, should any of these risks materialise, they could lead to both a downward revision of earnings forecasts and a decline in valuation multiples, resulting in a ‘double whammy’.

Short-term disruptions primarily include factors such as order recognition timing, equipment delivery schedules, exchange rates and quarterly revenue recognition. Whilst these factors may cause fluctuations in quarterly performance, they do not typically alter ASML’s technological barriers, customer relationships or long-term market position; they should therefore be regarded as short-term noise rather than a shift in the core investment thesis.

9.2 Key Risk Scenarios

At current valuation levels, the key determinant of ASML’s future share price is not whether the company can remain profitable, but whether its profit growth can justify the current high valuation. Therefore, potential upside and downside potential can be assessed by considering different profit and valuation scenarios.

Downside scenario: The core growth narrative is disproven.

Should AI capital expenditure slow significantly, major foundries cut investment in advanced processes, and the commercialisation of High NA EUV fall short of expectations, ASML’s future profit growth may be significantly lower than market expectations. In this scenario, the market may simultaneously revise down both EPS forecasts and the P/E ratio. If the P/E ratio were to fall from its current level of approximately 57 times to around 40 times, whilst future EPS were revised down by approximately 10 per cent–15 per cent, the share price could theoretically face a downside potential of approximately 30 per cent–40 per cent. Should the industry enter a pronounced downturn, with valuations returning further to historical lows, the decline could be even more pronounced.

Base-case scenario: Profit growth justifies the valuation.

If demand for AI continues to grow but the sector gradually returns to a normal cycle, with ASML’s future EPS continuing to grow whilst the P/E ratio gradually returns from its current high to its historical mean, then the share price may derive returns primarily from earnings growth. In this scenario, the upside potential for the share price is relatively limited, but the long-term fundamentals will still provide some support.

Upside Scenario: Fundamentals continue to exceed expectations.

If AI capital expenditure remains robust, EUV demand increases further, High NA EUV achieves successful volume ramp-up, and the company’s gross margin continues to improve, future EPS growth may consistently exceed market expectations. In this scenario, even if the P/E ratio ceases to expand, the share price still has room for further appreciation based solely on earnings growth of around 20–30 per cent; should the market simultaneously maintain a high valuation premium, the upside potential may be further amplified.

Consequently, ASML currently exhibits a relatively pronounced asymmetric risk profile: when fundamentals continue to exceed expectations, upside potential stems primarily from EPS growth; however, should the core growth narrative be disproven, the company may face both earnings downgrades and valuation compression, resulting in a decline significantly greater than that caused by a mere drop in earnings.

Assessment of Risk-Reward Ratio

Overall, ASML is a company with a high degree of long-term certainty, but its current risk-reward ratio is not particularly favourable. The key drivers of upside potential are AI demand, upgrades to advanced manufacturing processes, EUV penetration and the commercialisation of High NA EUV; whilst downside risks stem primarily from a slowdown in AI capital expenditure, clients’ capacity expansion cycles, export controls and valuation compression resulting from high valuations.

Consequently, ASML does not currently represent a typical ‘low-valuation, high-reward’ opportunity. Upside potential relies primarily on earnings consistently exceeding expectations in the future, whilst downside risks may be amplified by a dual contraction in earnings and valuation. At current valuation levels, the market has already paid a significant premium for the company’s long-term competitive advantages; therefore, investors require higher earnings growth to secure adequate risk compensation.

Part 10: Conclusions and Investment Recommendations

10.1 Research Summary

Based on the comprehensive analysis throughout this report, the key focus for ASML at present is not whether the company possesses competitive advantages, but rather the extent to which these advantages are already reflected in the current share price. From a long-term perspective, the company’s technological leadership in the EUV sector, demand for advanced processes and continuous product upgrades provide a strong foundation for earnings growth; however, from an investment perspective, high market expectations also mean that future share prices will be more sensitive to the extent to which earnings forecasts are met.

Consequently, the core investment dilemma facing ASML at present can be summarised as a balance between the certainty of fundamentals and the margin of safety in valuation. If AI capital expenditure, advanced process upgrades, and demand for EUV and High NA EUV continue to drive profit growth, and if actual EPS growth exceeds market expectations, the company still has scope to absorb its valuation through profit growth and achieve a further revaluation. Conversely, if industry demand merely meets market expectations, or even slows, whilst valuations remain at elevated levels, the upside potential for the share price may be limited.

Consequently, the key to assessing ASML’s investment value in the future lies not merely in whether revenue grows, but in closely monitoring whether profit growth can continue to exceed expectations, whether product upgrades can continue to improve profit quality, and whether the current valuation can be gradually absorbed as profits grow. These three factors will collectively determine ASML’s future investment returns.

10.2 Catalysts

Whether ASML’s investment thesis continues to hold true in the future depends primarily on several key operating indicators. Firstly, orders and bookings are the most important leading indicators for assessing future demand. If orders remain consistently strong, this indicates that major clients’ capital expenditure on advanced processes and AI-related technologies is still progressing, and also implies high revenue visibility for the future; if orders consistently fall short of expectations, this may suggest that clients are beginning to slow down their capacity expansion plans.

Secondly, attention must be paid to gross margin and EPS growth. If the proportion of EUV and other high-end products continues to rise, whilst gross margin and EPS continue to improve, this indicates that product upgrades are genuinely translating into profit growth; if revenue grows but profit margins continue to decline, the quality of current growth will need to be reassessed.

Thirdly, the commercialisation progress of High NA EUV will directly impact the company’s medium- to long-term growth potential. It will be necessary to monitor whether customer adoption, orders and equipment deliveries continue to progress. If High NA EUV can gradually achieve large-scale commercial application, it will open up new growth opportunities for the company; conversely, if commercialisation progress falls significantly short of expectations, it may undermine market confidence in long-term growth.

Furthermore, capital expenditure by major clients and export control policies are also significant external variables. Investment plans for advanced processes by clients such as TSMC, Samsung and Intel will directly impact demand for ASML’s equipment, whilst changes to export controls may affect the company’s market reach and order mix.

10.3 Clear Viewpoint

Based on the above analysis of ASML’s fundamentals, growth, valuation and risks, I believe the company’s long-term investment value remains strong, although the risk-reward ratio at current prices is not particularly favourable. ASML’s core competitive advantages and long-term growth logic remain intact; demand for AI computing power, upgrades to advanced processes and the evolution of EUV technology continue to provide a solid foundation for the company’s profit growth. Therefore, from the perspective of long-term industry dynamics, the company remains worthy of attention.

However, based on current valuations, the market has already priced in high expectations for future growth; consequently, any future rise in the share price will need to rely more on earnings consistently exceeding expectations, rather than simply on the continued expansion of valuation multiples. If future order intake and EPS growth continue to exceed market expectations, earnings growth can gradually justify the current high valuation, and the share price still has room for further appreciation; if results merely meet or fall short of expectations, however, the high valuation may become the primary constraint on share price performance.

Consequently, from an investment cycle perspective, ASML is better suited to medium- to long-term investors rather than those solely seeking short-term trading opportunities. For investment horizons of three to five years or more, the company’s technological barriers, demand for advanced processes and long-term product upgrades continue to offer strong certainty; for short-term investors, however, greater attention must be paid to financial reports, order trends and changes in client capital expenditure, as high valuations amplify the impact of short-term earnings volatility on the share price.

Overall, ASML currently appears to be in a state where it is “worth monitoring in the long term, but one should not blindly chase high prices”. Should valuations fall in the future whilst orders, profits and demand for advanced processes remain stable, the company’s risk-reward ratio will improve significantly; if the share price continues to rise without a corresponding upward revision to profit forecasts, the margin of safety will diminish further.

Source:

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[9]https://wallstreetnumbers.com/stocks/asml/pe-ratio

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