EUR 850.00 For Business Accounts Only

Morningstar | Future Is Bright for ASML's EUV Lithography Technology Following Positive Investor Day

At its investor day on Nov. 8, ASML management outlined its view on the lithography leader’s prospects and its road map for extreme ultraviolet, or EUV. The latter is critical to simplifying advanced process technologies and improving performance, while enabling cost reductions of 15% to 50% and reductions in cycle time of 3 to 6 times relative to current multipatterning workarounds. Initial insertion of EUV tools into production will be leveraged by foundry customers TSMC and Samsung for their 2019 iterations of 7-nanometer technologies, followed by modest EUV use for 16-nm DRAM at Samsung in early 2020. Although we believe 10 EUV layers will be the likely level of use in foundry settings (with 1 EUV layer requiring 1 EUV system per 45,000 wafer starts per month), we continue to be cautious in extrapolating EUV use to the high end of ASML’s estimate of 20 layers in the future. We are maintaining our $160 fair value estimate for narrow-moat ASML. Shares appear modestly overvalued today, and we see more attractive opportunities in wide-moat KLA-Tencor ($128 fair value), wide-moat Applied Materials ($49 fair value), and narrow-moat Lam Research ($185 fair value).

CFO Roger Dassen provided a 2020 financial model with multiple scenarios (high/low market demand and high/low EUV insertion), with sales ranging from EUR 10.1 billion to EUR 14.7 billion. Based on our assumptions for wafer fab equipment, EUV adoption, and broader semiconductor trends, we foresee 2020 sales of EUR 11.8 billion. Dassen also highlighted a 2025 model with sales of EUR 15.0 billion to EUR 24.3 billion. Although we don’t explicitly forecast ASML revenue this far out, we think the range is possible, though the high end appears overly aggressive. Worth noting is that ASML is on track to bring EUV gross margins to a comparable level as that of immersion lithography, with 2020 consolidated gross margins above 50% (up from 45% in 2017 and an estimated 47% in 2018).

The firm highlighted key EUV milestones across productivity (routinely running more than 1,000 wafers per day with over 2,000 demonstrated in certain limited settings), availability (trending toward required target of 90% but still lacking on average for both system and light source uptime), and defectivity (fewer than five defects per 10,000 wafer exposures). Meanwhile, the infrastructure for EUV in mask inspection and mask pellicles continue to require improvements, though we think the ecosystem (including KLA-Tencor and ASML’s Hermes Microvision acquisition) should deliver in time for 2019 production plans.