Threat Out of China Creeps Up on ASML: Is the Dip in the Stock Worth Buying?
Key Points
Chinese homegrown DUV machines should have little impact on ASML in the years ahead.
The company's Chinese revenue was already set to decline significantly, and it still has a monopoly over the more important EUV technology.
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Shares of ASML (NASDAQ: ASML) fell after technology publication The Information reported this week that an unnamed Chinese company backed by the Chinese government has begun manufacturing its own chip-making equipment. However, investors shouldn't be worried, as this is unlikely to hurt ASML's fortunes any time soon.
The machines reportedly being made in China are deep ultraviolet (DUV) lithography machines. This is an older technology used to manufacture older chips and the less critical components of advanced chips. DUV machines are also used to manufacture ordinary DRAM and flash memory. While ASML is a top supplier of DUV machines by a wide margin, it is not the only company that makes these machines. Japanese companies Nikon and Canon also supply them.
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What separates ASML from the pack, though, is that it is the only company in the world with EUV (extreme ultraviolet lithography) technology, which is needed to make advanced logic chips and is also used to make high-bandwidth memory (HBM). These are extremely complex machines, and competitors outside China have largely given up trying to replicate the technology. These are also the machines that drive ASML's growth. EUV machines can cost more than $220 million apiece, while DUV machines can cost as little as $5 million, with higher-end advanced immersion DUV machines running closer to $90 million.
While a loss of DUV sales to China could impact ASML's revenue, the region now accounts for a smaller share of its overall revenue. The company is restricted from selling EUV and advanced DUV machines to China and is only allowed to sell older-technology systems to Chinese companies. As such, only about 14% of its sales came from the country last quarter. Meanwhile, there was already a bill in Congress set to prevent ASML from selling or servicing machines for the first three Chinese companies expected to receive these homegrown DUV machines, so this revenue was likely to be cut off regardless.
A big AI chip and memory beneficiary
With a monopoly on EUV machines and a leading position with DUV machines, ASML is riding both the AI chip and memory booms. The company is set to increase its own EUV capacity by 30% both this year and next, and likely in 2028 as well, setting the stage for strong growth in the years ahead.
It has also developed a next-generation technology, called High NA EUV, that will help advance chip technology even further. While foundries are currently balking at these machines' $400 million price tag, they will eventually be needed, adding another growth driver.
With the AI chip and HBM markets surging, picking up this leading AI stock on this dip could be a smart move.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML. The Motley Fool has a disclosure policy.
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