ASML: Competing with Moore’s Law - [Business Breakdowns, REPLAY]

What It Covers

Tom Walsh from Baillie Gifford breaks down ASML, the Dutch semiconductor equipment maker that holds 100% market share in extreme ultraviolet lithography machines. The episode traces ASML's origin as a failed Philips subsidiary in 1984 to becoming the sole supplier of technology enabling Moore's Law and AI chip manufacturing.

Key Questions Answered

• •Monopoly through incremental design: ASML's modular machine architecture—where individual components are upgraded independently rather than redesigning entire systems—allows continuous derisked innovation. Investors should monitor component-level milestones (mirror development, light source power output) rather than waiting for binary product announcements, as progress is gradual and measurable across parallel development tracks.
• •Pricing discipline as competitive moat: Despite holding 100% EUV market share, ASML deliberately targets a 50/50 profit-improvement split with customers like TSMC, Samsung, and Intel. This restraint prevents customers from funding alternative technologies. Businesses with monopoly pricing power should calculate the incentive threshold at which customers seek substitutes before extracting maximum margin.
• •Supply chain as both moat and vulnerability: Roughly 80% of ASML's cost of goods sold comes from external suppliers. When suppliers cannot keep pace—as with light source maker Cymer and lens maker Zeiss—ASML acquires stakes or full ownership. Investors should track whether key single-source suppliers in any capital equipment business can sustain the required R&D investment independently.
• •Cyclicality reduction through irreplaceability: ASML sold 345 machines in 2022 at over €150 million each, generating €21 billion in revenue with 50%+ gross margins, up from 30% a decade prior. Customers who cancel orders lose queue position with no alternative supplier, structurally dampening the severe revenue cycles that historically plagued the semiconductor equipment industry.
• •Geopolitical concentration risk is quantifiable: In 2022, approximately 40% of ASML sales went to Taiwan, 30% to South Korea, and a material portion to China. Investors in semiconductor equipment should map customer revenue by geopolitical region and stress-test scenarios where export restrictions or regional conflict disrupts delivery to any single geography exceeding 30% of revenue.