The Kingmaker of Silicon: Why ASML Controls the Future of Computing

The most sophisticated machine ever built by humans isn't a rocket ship or a nuclear reactor - it's a device that prints patterns on silicon chips using beams of light. And only one company in the world can make it.

ASML, a Dutch company that most people have never heard of, has become perhaps the most crucial link in the global technology supply chain.

Their extreme ultraviolet (EUV) lithography machines, each costing over $180 million and requiring 40 freight containers plus three cargo planes to ship, are absolutely essential for manufacturing the most advanced computer chips that power everything from smartphones to AI systems.

This analysis explores how ASML built this remarkable monopoly, why their recent stock decline might present an opportunity, and what it means for the future of technology.

Let's dive in.

The Perfect Monopoly

Imagine trying to write with a pen that's a mile long. Now imagine having to do it with nanometer precision, thousands of times per second, while the paper is moving. That's roughly analogous to what ASML's machines accomplish with light.

The company's dominance isn't just about technical excellence - it's about systematically eliminating the possibility of competition through strategic acquisitions, exclusive supplier relationships, and relentless innovation. With a 95% market share in lithography and complete monopoly in EUV (extreme ultraviolet) technology, ASML has created what might be the most defendable competitive position in any technology market.

During ASML's recent earnings call, CEO Christophe Fouquet highlighted their unique position:

This dominance didn't happen by accident. Through a carefully orchestrated series of strategic acquisitions over two decades, ASML has both accelerated its own development and effectively prevented competitors from emerging.

The acquisition of SVG in 2001 proved particularly crucial. At the time, SVG was ASML's main rival in developing EUV technology and held vital patents for wafer stepper technology. The deal not only gave ASML access to the U.S. market but eliminated their primary competitor in the race to develop next-generation lithography. The company followed this with the strategic purchase of Brion Technologies in 2007, a pioneer in computational lithography whose software became essential for verifying and correcting chip designs before production.

Perhaps most prescient was the 2013 acquisition of Cymer, the leading manufacturer of the specialized lasers that create the intense light needed for chip patterning. This vertical integration proved invaluable as EUV technology matured. The addition of Hermes Microvision in 2016 brought in their electron beam inspection technology, crucial for detecting defects in chips at advanced nodes, while the 2020 acquisition of Berliner Glas Group, a specialist in precision optics, secured ASML's supply of the highly specialized optical components needed for their most advanced machines.

The AI Catalyst

The explosion of artificial intelligence has exposed both ASML's crucial role in technology advancement and some interesting market dynamics. While AI chip demand is surging, the broader semiconductor market has seen slower recovery in areas like mobile and PCs. This divergence has created a fascinating dynamic where ASML's customers are simultaneously expanding and contracting capacity, depending on their exposure to different end markets.

This bifurcation in the market helps explain ASML's recent guidance for 2025 revenue between €30 billion and €35 billion, down from their previous range of €30 billion to €40 billion. However, what's particularly interesting is that they maintained their 2030 outlook of €44 billion to €60 billion in revenue. This suggests the company sees current headwinds as cyclical rather than structural.

The AI dynamic becomes even more interesting when considering the specific requirements of AI chip production. These chips typically require more advanced nodes and more sophisticated lithography processes than traditional semiconductors. This means that while overall chip demand might fluctuate, the demand for ASML's most advanced tools - particularly their EUV systems - remains robust.

This suggests something crucial about ASML's position - while they're not immune to semiconductor industry cycles, their monopoly position and the increasing importance of advanced chips means each cycle tends to reach higher peaks. The company's ability to maintain pricing power even during downturns further reinforces this advantage.

Opportunities for Growth

The semiconductor industry is undergoing a fundamental transformation that plays directly into ASML's strengths. While the market focuses on quarterly order rates and near-term guidance, several massive structural shifts are reshaping the industry's future.

The first wave is driven by what industry insiders call "technological sovereignty" - the recognition that advanced chip manufacturing capability has become a crucial national security priority. Major foundries have committed over $300 billion to expand manufacturing capacity globally, with countries racing to establish domestic semiconductor capabilities. Each new fab, regardless of location, requires ASML's advanced machines.

Simultaneously, emerging technologies are dramatically increasing semiconductor demand. Electric vehicles use roughly double the chip content of traditional vehicles, while the shift to renewable energy requires sophisticated power management chips. The rise of AR/VR, autonomous systems, and industrial automation creates additional demand vectors. Industry projections suggest this could drive nearly double-digit annual growth through 2030, with particularly strong expansion in data center, automotive, and industrial applications.

Most crucially for ASML, chip complexity continues to rise. Each new generation requires more sophisticated lithography processes and often more EUV layers per chip. This means ASML's revenue per wafer tends to increase even in stable markets. Combined with their near-monopoly position, these trends suggest ASML's market dominance could actually strengthen over time rather than erode.

The Technology Moat

Understanding ASML's competitive advantage requires appreciating the sheer complexity of their technology. Their latest EUV machines contain over 100,000 parts and represent the culmination of decades of research and development. These aren't just complex machines - they're marvels of engineering that operate at the boundaries of what's physically possible.

The process begins with creating extreme ultraviolet light with wavelengths of 13.5 nanometers - a feat that requires heating tiny droplets of tin to millions of degrees. This light must then be precisely controlled using a system of mirrors, as traditional lenses would simply absorb EUV light rather than transmit it. The entire system operates in a perfect vacuum, as even air molecules would interfere with the EUV light.

The precision required is almost impossible to comprehend. The machines must position wafers with accuracy down to atomic scales, while simultaneously moving them fast enough to maintain economically viable production rates. This combination of extreme precision and industrial-scale production makes ASML's machines unique in the history of manufacturing technology.

The latest High-NA EUV systems, costing around $380 million each, represent an even more remarkable achievement. These machines offer three times better resolution than their predecessors and are crucial for advancing semiconductor technology beyond current limits.

The fact that customers are willing to pay nearly $400 million per machine - more than many commercial aircraft - speaks to their absolutely essential role in advanced chip production.

Market Dynamics & Investment Implications

After reaching new highs in 2024, ASML's stock has pulled back significantly, presenting what might be an attractive entry point. The recent decline stems from several factors that warrant careful analysis.

The normalization of ASML's China business represents one significant headwind. After working through a large backlog that had built up due to previous restrictions, China sales are expected to settle at around 20% of revenue. While this represents a significant decrease from recent levels, it actually reflects a return to more sustainable long-term patterns rather than a fundamental deterioration of the business.

The memory market presents another challenge, albeit one with interesting nuances. While AI-driven high-bandwidth memory demand remains strong, broader memory markets show considerable caution. This split in the market mirrors the larger bifurcation between AI-related and traditional semiconductor demand, though ASML's position at the leading edge helps insulate it from the worst of the downturn.

Competitive dynamics among ASML's customers have also impacted near-term expectations. Some key customers face challenges in their process technology development, leading to delays in capacity expansion. However, these delays likely represent a timing shift rather than a permanent reduction in demand, as the need for advanced semiconductor manufacturing capacity continues to grow.

Despite these headwinds, several structural factors suggest the current pullback might represent an opportunity. The company maintains a robust backlog of over €36 billion, providing significant visibility into future revenue. The acceleration of AI infrastructure deployment continues to drive demand for advanced nodes, where ASML's machines are absolutely essential.

The company's pricing power remains exceptional, with their monopoly position allowing for continuous price increases even during industry downturns. This pricing power extends beyond just new machine sales - ASML's growing installed base drives an increasingly profitable service revenue stream that helps smooth out the cyclical nature of equipment sales.

Looking Forward

ASML's position at the nexus of artificial intelligence, semiconductor advancement, and technological sovereignty makes it uniquely positioned for long-term growth. While short-term cycles will continue to impact results, the company's monopoly position and the increasing importance of advanced semiconductor manufacturing suggest each cycle should reach higher peaks.

The acceleration of AI infrastructure buildout represents perhaps the most significant near-term catalyst. EUV systems are used to produce leading edge semiconductors for memory players like Micron, SK Hynix, and Samsung. As companies race to deploy AI capabilities, the demand for advanced logic and memory chips continues to grow. This drives demand not just for ASML's current EUV systems, but also creates a compelling adoption case for their new High-NA EUV technology.

The transition to new memory and logic nodes provides another crucial growth driver. As semiconductor manufacturers push toward ever-smaller feature sizes, the number of EUV layers per chip tends to increase, driving additional demand for ASML's machines. The company's recent demonstration of their NXE:3800E system achieving full 220 wafers per hour throughput suggests they continue to improve the economic proposition for their customers.

Changes in export controls remain a wild card that could significantly impact ASML's business. However, the company's careful management of geopolitical risks and strong relationships with governments and customers in multiple regions helps mitigate this risk. Their strategic importance to both Western and Asian semiconductor manufacturing provides a degree of protection against extreme policy outcomes.

The chance to buy the company that controls modern computing at a discount doesn't come along often.

But that's why you read The Forward Thesis.

Until next time.