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Morningstar | ASML Overcomes Industry Weakness With Solid Second-Quarter Results; Shares Remain Overvalued

ASML is the primary source of photolithography tools for semiconductor manufacturers. Photolithography is the process in which a light source is used to expose circuit patterns from a photomask onto a semiconductor wafer. A photomask is a flat, transparent quartz plate containing the microscopic circuit pattern. The latest technological advances in this field allow chipmakers to continually increase the number of transistors on the same area of silicon.Lithography tools account for a significant portion of chipmakers' capital expenditures, with next-generation extreme ultraviolet, or EUV, platforms exceeding $100 million in price. ASML's immersion lithography tools have allowed the company to capture and maintain the leading position in the marketplace, while competitors like Nikon and Canon do not have the scale or resources to compete at the cutting-edge.To continue pursuing Moore's Law, chipmakers will require EUV lithography tools, which have been in development by ASML. The top three customers of the firm (Intel, Samsung, and Taiwan Semiconductor) committed to help fund a portion of research and development for EUV technologies and also acquired an aggregate 23% minority equity stake in ASML (though these stakes have come down recently). In 2013, ASML acquired a key supplier, Cymer, for its light source technology, which has since accelerated the development of EUV. The latest EUV lithography tool is considerably more expensive than incumbent tools, with a price tag of over $100 million. In November 2016, ASML closed its acquisition of Hermes Microvision, a major wafer inspection provider. ASML expects to leverage Hermes' expertise to provide detailed patterning information that ASML can then use to optimize its EUV lithography systems.We expect ASML to materially benefit from the proliferation of EUV, though the exact timing of adoption in high-volume manufacturing is uncertain. The most likely scenario, in our opinion, is for the technology to be implemented for a few process steps in the 7-nanometer node at foundry customers that will ramp in 2019. However, chipmakers will continue to rely on immersion lithography for the majority of process steps.