ASML's Trailblazing Moat Draws Investor Scrutiny

Business Insider

4 days ago

ASML Holding N.V. (ASML) stands as a cornerstone of the global semiconductor supply chain—arguably one of the most irreplaceable companies in the industry. With a near-monopoly on the most advanced lithography technology used to etch circuits onto microchips, ASML has capitalized on powerful secular trends, driving years of exceptional growth and profitability.
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Still, even a company with ASML's unmatched competitive edge isn't immune to cyclical slowdowns and timing challenges. While its core fundamentals remain strong, recent indicators—such as slowing bookings and softening short-term demand—suggest a cooling period is underway.
According to market data, ASML's performance has notably slowed over the past three months, indicating that the S&P 500 (SPX) has started to outperform ASML stock.
While long-term demand for advanced chips remains solid, the current cycle has lost some steam. ASML is likely to experience a slower phase until inventories reset, next-generation technologies gain traction, and geopolitical tensions ease.
Even though the stock is trading at historically low valuation multiples, it doesn't look especially cheap when viewed through an operational lens—its yield currently falls short of covering the cost of capital. The long-term case for ASML remains compelling, but for now, I'm maintaining a Hold rating.
The Unmatched Moat Behind ASML's Technology
To understand ASML is to recognize the strength of its competitive moat. At the heart of its dominance is a near-monopoly on extreme ultraviolet (EUV) lithography—a technology that no rival has come close to replicating.
ASML manufactures lithography machines, the critical tools that use light to etch intricate patterns onto silicon wafers. There are two main types: deep ultraviolet (DUV), which is widely used across various chip types, and extreme ultraviolet (EUV), which enables the production of today's most advanced and densely packed semiconductors. ASML's EUV systems are essential to leading chipmakers like TSMC (TSM), Samsung (SSNLF), and Intel (INTC).
While other firms produce DUV tools, they serve lower-end or legacy nodes. Competing with ASML in EUV would require decades of R&D and tens of billions in investment—making any serious challenge to its leadership extraordinarily difficult, if not improbable, in the foreseeable future.
The Numbers Behind ASML's Competitive Edge
With technology increasingly reliant on advanced, high-performance chips, ASML's EUV orders have gone through the roof, as chipmakers collectively invest hundreds of billions of dollars in CapEx every year to prepare for future demand.
The result has been that ASML's revenues grew at a CAGR of 18% over the last decade, while operating income grew at a CAGR of 19%. Of course, now that the company has reached a more mature stage, growth is plateauing—revenue is expected to rise by approximately 8.5% annually over the next two years.
Still, considering ASML currently has gross margins of 52% and is targeting 56% to 60% over the next five years, EPS growth is also expected to slow slightly, with earnings per share projected to increase around 14% over the next two years.
But arguably, one of the most essential parts of the thesis is ASML's ability to generate profits relative to its cost of capital. For example, ASML posted an ROIC of about 24.7% in Q2 —marking the sixth consecutive quarter of growth.
Assuming a weighted average cost of capital (WACC) of approximately 8%, the ROIC, which is significantly above the WACC, demonstrates the company's consistent ability to create shareholder value that exceeds its financing costs. And even though ASML's free cash flow yield is a modest 3.6%, that's not necessarily a problem, since there's confidence that reinvested capital will return as growing profits down the road, thanks to its strong tech moat.
What's Driving ASML's Bearish Momentum?
Despite the generally positive financial metrics, ASML's momentum has been very bearish. The stock's negative returns of nearly 18% over the last twelve months reflect headwinds from slowing sales and net bookings, the cyclical nature of the semiconductor industry, and other factors like tariff uncertainties and supply chain restrictions. TipRanks data shows ASML's sales drop-off over the past two quarters:
For example, after reporting Q2 earnings ten days ago, ASML's shares dropped as much as 14% in the following trading sessions, driven mainly by soft guidance for Q3 2025 and the lack of any guidance for 2026. This triggered a wave of downward revisions from the market, which now expects Q3 revenue growth of $9 billion—nearly 5% below previous estimates.
In my view, the weaker guidance is more a matter of timing than a structural collapse. ASML's main customers are adjusting the timing of their capital expenditures (CapEx) investments due to high inventories in specific segments, such as PCs and smartphones. Additionally, geopolitical and export restrictions, primarily between the U.S. and China, are also weighing on demand.
What to Consider Before Buying the Dip
For those eager to call this a clear-cut buy-the-dip moment, I'd urge some caution. One way I evaluate capital-intensive businesses like ASML is through earnings yield—operating profit divided by enterprise value (market cap plus debt). This metric strips away capital structure and taxes to focus on core operating performance. Over the past 12 months, ASML posted $13.1 billion in operating profit against a $272.4 billion enterprise value, translating to an earnings yield of roughly 4.8%—notably below the estimated WACC of around 8%.
The stock also trades at a 27x earnings multiple —well below its five-year average of 42x, though still not what most would call cheap. Yes, with reinvestment returns estimated at roughly 3x the cost of capital, a premium valuation can be justified—if the moat holds firm. But the recent bearish momentum tells a different story. Currently, the market appears hesitant to reward ASML with a high multiple for a reinvestment thesis that relies on both a sustained competitive advantage and a clear cyclical upturn.
Is ASML a Buy, Hold, or Sell?
According to Wall Street analysts, there is mixed sentiment for ASML at present. Among the nine analysts covering the stock over the last three months, four are bullish, while five are neutral, with none bearish. ASML's average stock price target of $863.83 implies approximately 21.5% upside potential over the next twelve months.
Investors Beware: Do Not Buy the ASML Dip
For investors who see the recent sell-off as an obvious 'buy the dip' opportunity, it's important to remember that the operating yield still doesn't cover the cost of capital. Patience is key—the payoff only comes if the ROIC stays strong and the cycle turns in ASML's favor.
Given ASML's solid moat, I don't expect this to be a long-term issue. However, in the short term, I'm not willing to pay just to wait, especially since the stock isn't yet showing clear signs of a cyclical rebound or the return of tailwinds. For now, despite the long-term potential, I'm waiting for clearer signals and maintaining a Hold rating.