High-end semiconductor manufacturing, the bedrock technology behind AI development, is a tight-knit industry. The engineering and design of advanced computer chips is dominated by American tech companies such as Nvidia and Intel. Taiwanese giant TSMC has a near-monopoly on the actual fabrication of chips developed in the U.S., building 92% of the world’s advanced chips at its factories.
And then there’s ASML. Founded in the Netherlands in 1984, the lesser-known firm is dominant in a niche of its own: building and selling the high-end, extremely specialized machines TSMC and other foundries rely on to fabricate and package semiconductors. ASML might not get as much buzz as other chip companies, but it’s a vital part of the semiconductor supply chain, and the $362 billion firm is poised to reap huge rewards from the AI boom.
“On a high level, ASML is beyond well-positioned,” Michelle Brophy, director of research for tech, media and telecom at research platform AlphaSense, told Fortune. “I wouldn’t bet against ASML.”
That’s not to say there aren’t bumps in the road: Lower-than-expected sales numbers reported this week generated a stock selloff, and ASML is caught in the political crossfire of the semiconductor arms race between the U.S. and China. But as new chip-manufacturing facilities subsidized by the CHIPS Act go live in the U.S., ASML is poised to benefit.
Semiconductor manufacturing is an incredibly technical process, relying on specialized equipment and skilled labor to design and build ever-smaller and more powerful computer chips. From the 1950s through the 1990s, it was common for chipmakers such as Intel to control every step of the process, from design to manufacturing. But as engineers began to invent smaller and more powerful chips, the business model shifted towards specialized companies focusing on a single part of the process.
Today, just a few niche companies dominate the global supply chain for advanced chips. Nvidia, which focuses exclusively on design and does no manufacturing, currently designs more than 90% of chips used for AI development. TSMC, which does no design of its own and only takes manufacturing orders for its factories, has a near-monopoly on physically producing AI chips.
And ASML has perhaps the deepest niche of them all: exclusive possession of the highly specialized equipment that TSMC uses in its factories.
The most important tool in advanced chip manufacturing is the extreme ultraviolet (EUV) lithography machine. The high-end, powerful chips used for AI are manufactured by using an EUV lithography machine to etch tiny designs onto extremely thin silicon wafers, which are then stacked and combined into chips.
“If you look at a gang box—where you walk into a door, you can flick one switch and turn on the fan, and one switch to turn on the light, and one switch turn on the other light—behind the wall, you have copper wires. It’s [the same principle as] semiconductors,” President and CEO of the National Institute for Innovation and Technology Mike Russo told Fortune. “With ASML doing EUV, they’ve been able to get features down to one fifty-thousandth of a hair. Think of the amount of wires, instead of the copper wire on your wall, that you actually put on one layer of a chip.”
EUV lithography machines cost hundreds of millions of dollars—and ASML is the only company on Earth that makes them. Each machine contains over 100,000 parts, and they’re so large that they require three jumbo jets to ship. The cost and complexity of ASML’s business has helped shield the company from competition.
“The tools are so expensive,” Russo said. “A new EUV tool from ASML is probably $250 million. One tool.”
Investors handed ASML a setback Wednesday after lower-than-expected order numbers caused a selloff that cut share prices by around 7%, even though CEO Peter Wennink assured investors the reduction in sales was temporary and the company expected stronger figures in the second half of the year. But Brophy said the retreat was likely more a factor of investors’ astronomical expectations for companies in the AI space than any deeper threats to ASML’s business.
“In my view, the setup is not great for AI-related companies, just because they’re primed for perfection…any disappointment in the numbers was going to create a negative reaction,” Brophy said. “I really don’t see…an issue with the business longer-term.”
One driver of investors’ concern—and a potential threat to ASML’s business going forward—is ASML’s position in the middle of the ongoing rivalry between the U.S., Europe, and China for dominance in semiconductor production.
The Biden administration unveiled export controls in 2022 that prevent American chip designers such as Nvidia from sharing their most advanced designs with Chinese producers. American authorities have also been pressuring the Dutch government and ASML to limit sales to China and stop providing maintenance services to Chinese firms, as China seeks to develop domestic chipmaking capacity and wean itself off of dependence on Western chip designers and Taiwanese foundries. China was ASML’s biggest market last year, generating about a third of its revenues.
“China always opposes the U.S. overstretching the concept of national security and making various excuses to coerce other countries into imposing a technological blockade against China,” Chinese foreign ministry spokesperson Wang Wenbin said in January.
Brophy said a potential escalation between the U.S. and China in terms of semiconductor policy would affect not just ASML, but the entire chips market.
“Overall, does it pose a risk? It does,” Brophy said. “It’s not an ASML risk, it’s an overall demand risk…a big escalation between the two countries would affect that demand picture longer term, in my view.”
China notwithstanding, ASML sees upside over the next year: CFO Roger Daasen predicted “recovery for the industry in 2024 and…a stronger year in 2025.” Much of that optimism is driven by a slew of new American semiconductor manufacturing facilities, or fabs, being rolled out with the help of money from the CHIPS and Science Act, which could offset any revenue losses in China.
In just the past few weeks, the Commerce Department has announced over $20 billion in grants for new fabs from TSMC, Intel, and Samsung. That will likely mean a steady stream of orders for ASML’s equipment, which is essential to manufacture the advanced AI chips the Biden administration is so keen on onshoring.
“If one customer were to drop out, and I don’t think that’s the case, there would be another one lined up to take their place because there are so many projects happening right now,” Brophy said. “The U.S. CHIPS Act has already awarded $12 billion dollars to [TSMC] and another $6 billion to Samsung alone, Intel is in there as well. They’re all building fabs in the U.S. But let’s not forget about [other] geographies, like Japan—[TSMC] has already invested north of $20 billion for facilities there.”
ASML has built a dominant position in a highly specialized niche, almost entirely shielding it from competition. Current chief business officer Cristophe Fouquet will have big shoes to fill when he takes over as CEO later this month—his predecessor oversaw a 1,400% increase in the company’s share price. But big picture, the outlook’s good: AI’s seemingly insatiable demand for advanced chips and ASML’s near-insurmountable lead in the equipment space are big tailwinds that show no signs of slowing down.
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