ASML: The $360B EUV Lithography Equipment Giant

Highlighting the importance of ASML's EUV Lithography technology in semiconductor manufacturing and in designing AI chips

While the focus often falls on Taiwan as a single point of failure within the global semiconductor supply chain, another pivotal player emerges from Europe: ASML. This Dutch giant designs and manufactures the critical equipment that foundries rely on to produce chips. Some even say ASML is the single company keeping Moore’s law alive, with its machinery enabling the production of smaller, faster, and more efficient microchips. ASML pioneered Extreme Ultraviolet (EUV) lithography technology. EUV lithography uses extremely tiny light beams to draw very fine details on microchips, allowing them to be smaller, faster, and more powerful.

EUV lithography machine featuring its Dutch origins in the Netherlands

In the image below, you can see the full process from wafer in to wafer out in microchip manufacturing. ASML’s approach is based on the intelligent integration of computational lithography, lithography systems and machines, and metrology and inspection:

Source: ASML annual overview

ASML Company Overview

While ASML doesn’t have a ton of customers (and only sells a few hundred machines per year), its equipment are unbelievably critical in manufacturing chips. The machines continue to evolve each year for higher precision and more advanced technology, but old machines last quite a long time. Since ASML began selling in 1987, over 95% of all lithography machines that its sold are still active in the field today, manufacturing new chips. Talk about reliability!

The staggering costs of these EUV machines underscore their unparalleled importance in delivering cutting edge chips. Each EUV machine costs on average €150M (!!!) in 2023 — comparable to the size of a school bus at 33ft long, 17 ft wide and 13ft tall. Each weighs 331,000 pounds and is shipped in 250 crates, requiring over three transport aircrafts for delivery of over 100,000 individual parts and modules.

ASML has over 5,100 unique suppliers that work with it to create its products, with over €15.5B of annual spend to suppliers each year. 40% of its total sourcing spend is in the Netherlands, 40% in rest of Europe, 13% in the US and 7% in Asia. Its supply chain to produce these machines end to end is incredibly complex.

ASML has 42K total employees, with 24K in Europe, 9K in Asia and 8K in the US.

EUV and Lithography Systems

Extreme Ultraviolet (EUV) lithography is a sophisticated technology used in the production of microchips, which are the heart of all modern electronics. EUV lithography utilizes extremely short wavelengths of light—just 13.5 nanometers—to create incredibly small and precise features on silicon wafers, the thin discs used to make microchips. This technology is crucial for producing the latest generation of microchips, which require intricate patterns that are too fine for older forms of lithography. The use of EUV light allows for smaller, more powerful chips that can handle more tasks at higher speeds, which is essential for advancements in everything from smartphones to supercomputers.

Lithography systems, in general, are used to print tiny, complex patterns of electronic circuits onto silicon wafers. This is done by shining light through a mask (which holds the circuit pattern) onto a light-sensitive chemical layer spread over the wafer. The light changes the chemical structure of this layer, creating a pattern that can then be chemically etched to build up the electronic circuits layer by layer. The precision with which these patterns are printed directly affects the performance and efficiency of the finished microchips. As chip features have shrunk to the nanometer scale, advanced lithography systems like EUV have become indispensable in pushing the limits of what microchips can do.

Customers

ASML sells to all the global foundries and manufacturers of chips, namely TSMC (see our: What does TSMC do), Intel, Samsung, GlobalFoundries and UMC that supply CPUs, GPUs and other logic machines (ASML’s Logic segment below). ASML also has customers that use its products to manufacture memory — SK Hynix, Micron and Samsung (Memory segment below). The Company also offers service and maintenance on its machines, which typically last 20 years — this is a sizable piece of revenue given the complexity of the machinery.

ASML’s customers are a good representation of where chips and memory are manufactured globally — with Asia showing its dominance. In the past year, a full 84% of sales were to Asia — with Taiwan leading the way at 30%. Typically China is a high single digit percentage of sales, but fearing export bans of these high intellectual property EUV machines, Chinese foundries have been hoarding ASML machines — last year representing 26% of total sales. South Korea represented 25% of total sales, while the US came in at just over 11%.

ASML sold 449 lithography systems and 53 EUV systems in 2023, growing its sales by over 30% year-over-year. Each EUV machine costs approximately €150M per system, representing ~€8B in annual sales; while lithography systems can vary more in price from hundreds of thousands to hundreds of millions each — with lithography representing €13.9B of sales.

The Company believes its sales will outpace overall semiconductor end market growth, which it projects to grow from ~$700B today to over $1.3T by 2030 (11% CAGR).

Business and Financial Overview

In 2023, ASML generated €27.6B of revenue, up over 30% from 2022. Systems sales (Lithography and EUV) were $21.9B (which are growing even faster at 42% year-over-year) while service and field option sales were €5.6B (down 2% year-over-year).

ASML operates at 51.3% gross margins, which are improving year over year by about a percent each. Its supplier costs to over 5,1000 suppliers are the bulk of costs-of-goods sold. ASML operates at ~33% EBITDA margins and 28.4% net income margins, generating €9B of operating income last year.

EUV’s Relevance to AI

The vast majority of ASML’s growth in 2023 was driven by its NXE and DUV immersion models, which are its latest models designed for the highest precision chips used by AI. ASML's NXE and DUV systems are essential for making advanced microchips, especially those for AI. NXE machines use extreme ultraviolet light to create very small and complex parts necessary for high-performance AI chips. DUV systems, while not as advanced as NXE, are still crucial for producing many parts of these chips, making them both important in the chip-making process.

Some estimates say that of the total EUV machine install base globally, TSMC owns over 50% of these machines. TSMC's early adoption of ASML's advanced EUV lithography technology allowed it to produce smaller and more powerful chips more efficiently than its competitors. This technological edge helped TSMC lead in the market by being able to meet the increasing demand for high-performance semiconductors used in various tech devices.

ASML is well-positioned to benefit from the expanding AI chip market, as its advanced lithography systems are crucial for producing the sophisticated chips that are becoming increasingly complex. While the Company may face some short-term challenges with China sales due to geopolitical tensions, it’s poised to become an increasingly strategic focal point in the world of semiconductor manufacturing and AI. ASML plays a crucial role as Europe’s leading company in the semiconductor industry and its leading AI company.