ASML - The Coolest Company You Have Never Heard Of & Why It Matters

We would like to bring together two of our favorite themes to introduce one of the world's most important companies.

The themes in question are:

• ​Sanctions can often prove very underwhelming over the long term.​

• ​It is better to buy shovel makers than miners during a gold rush.​

Today, we'd like to bring these themes together to talk about another great shovel maker for the boom in artificial intelligence. In particular, we would like to focus on the massively successful and valuable Dutch high tech manufacturing company, ASML, and discuss what could derail its phenomenal success.

You might not have heard of this company but ASML is a firm that produces top end chip making equipment.

Specifically, they have a veritable monopoly on the production of extreme ultraviolet lithography machines. Like gold itself, these machines are highly coveted the world over though for very different reasons. Whereas gold has few practical purposes, an ASML EUV lithography machine is essential for the production of the most advanced semiconductors.

Predictably, their monopoly allows ASML to charge incredibly high prices. Each one of their most sophisticated machines sells for over $200 million and even a run of the mill one costs over $100M. This combination of a niche monopoly with strategic high tech ensures that ASML's profit margin is well over 50%. It is this ridiculously high percentage and their consistent profits year after year that have turned ASML into a $280 billion tech behemoth.

Even in the middle of an AI (and AI chip) gold rush, we haven't written much about ASML because it is listed in Amsterdam and not available to easily buy for most US-based investors - Pebble or otherwise.

And those investors are otherwise spoilt for choice. After all, the US also has most of the big, publicly listed AI companies already and, just as importantly, we have recently cautioned against partaking in that frenzy at these levels.​

However, ASML's recent earnings nonetheless called attention to the world's second coolest "AI shovel maker."

The back story of ASML is pretty incredible. The lithography company isn't in Amsterdam or Rotterdam but rather in the tiny town of Veldhoven (population ~45,000!) outside of Eindhoven.

The company's buildings are by far the biggest for miles and their headquarters is set amid the farms and dikes of the Dutch countryside nearly 100 miles from Amsterdam. It is hard to be 100 miles from Amsterdam and still be in the Netherlands!

Somehow, however, it is from the middle of these classic Dutch scenes of flat landscapes and big skies studded with windmills that Europe's most valuable tech firm has emerged.

Great things often start from humble beginnings, however, and their powerful technology and central role in building semiconductors has given them a position similar to Nvidia's GPUs. ASML's machine are tremendously sought after around the world.

This provides an insight into what is perhaps the biggest threat to the company's extranormal profit. Similarly to Nvidia, ASML are subject to significant sanctions and political pressure.

This isn't really new. The Dutch government has long restricted their export of the most sophisticated lithography machines to China but, similar to Nvidia's GPUs the regime has only tightened in recent years. The latest restrictions dropped in June when another whole class of machines (deep ultraviolet lithography) was restricted. ​

​These led to protests in the Dutch government about US interference but there isn't much of a choice. As the Germans have already found out to their cost, it is in the Netherlands' strategic interest to think very carefully about what technology they let flow to China.

You wouldn't notice any of these restrictions and controversy from ASML's recently listed revenues however.

• The company just announced that they had second-quarter sales of €6.9 billion and net income of €1.9 billion.

• Both of these easily beat market expectations of €6.74bn and €1.82bn.

• The company also raised its guidance for 2024.

• The company's leadership now expects 2023 sales growth of about 30% versus the 25%+ expected earlier this year.

Put it all together and this would be more than double last year’s net sales growth and at a time when actually many non-US or China customers have been cutting orders due to economic weakness.

This raises eyebrows and also questions in Washington DC as well as Brussels and elsewhere. It also demonstrates that the current restriction system will likely tighten in the near future.

The argument for this surge in revenue and business is that ASML has a huge backlog of orders for their machines. As much as two years for some models.

But there is the obvious question of whether these machines are all ending up in the right place? It seems likely that the answer is no when many customers are canceling orders but sales are still growing at 25-30% per annum.

But perhaps more importantly still, all of this raises another question not asked nearly enough. ASML is only the final step in a very long production process. They may gain the most but they are vulnerable elsewhere. ASML does incredible work but as they quickly admit, they are really the final step in a simply massive global supply chain.

​The company has over 5000 Tier 1 suppliers alone and many of them are spread out all over the world. In fact, as the company itself admits, its willingness to collaborate Can this company or can the powers that be assure themselves that this supply chain is not dependent on China or any of its close allies?

That could be a hint at the real risk here and one that joins the reasons that gold is rising and what could halt AMSL in its tracks - at least for a time.

The fear of geopolitical events that is driving gold higher would be potentially catastrophic for ASML's supply chain and, in turn, its ability to manufacture its products and develop the next generation.

ASML may be headquartered in the Netherlands but its products are truly a global effort with thousands of suppliers and hundreds of thousands of components and materials. Regrettably for all us, the systems of trade and innovation that have made that possible are coming undone.

It is very difficult to break a monopoly but the rising gold price signals at one of the few tried and tested ways to do so: political conflicts and eventually, war.

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