Every chip more advanced than a microwave controller passes, at some point in its life, through a machine built in Veldhoven, the Netherlands. There is no second source. There is no domestic substitute program that has come within a decade of replicating it. ASML's extreme ultraviolet lithography systems are the single hardest manufactured object on earth — 100,000 parts, a light source that fires tin droplets 50,000 times per second, and mirrors polished so flat that if one were scaled to the size of Germany, its largest bump would be less than a millimeter high.
The market knows all of this. ASML's monopoly is arguably the most well-documented moat in public equities. And yet I believe the stock remains meaningfully mispriced — not because investors doubt the moat, but because they persist in valuing ASML as a cyclical equipment vendor when it is quietly becoming a royalty on computation itself.
The thesis in one paragraph
Semiconductor capital intensity is rising structurally, not cyclically. Each node transition shifts more of the industry's total capex toward lithography, and within lithography, toward ASML's most expensive tools. High-NA EUV systems sell for roughly €350 million each — more than twice the price of the prior generation — and every leading-edge manufacturer has now committed to them. ASML's revenue per wafer of leading-edge capacity is going up even when unit volumes stall. That is the definition of pricing power, and it is not in the multiple.
What the backlog actually says
The €38 billion order backlog is usually cited as evidence of demand. I think its composition matters more than its size. Over 60% is now EUV and High-NA — up from roughly 40% three years ago. The mix shift means backlog conversion carries structurally higher gross margin: EUV tools carry margins several points above the corporate average, and service contracts attached to each installed system compound for the tool's 20+ year working life.
The installed-base business is the underappreciated engine. Service and upgrades already generate roughly a quarter of revenue at margins that rival the best software companies, and this revenue is contractual, recurring, and entirely insensitive to the memory cycle. Every system ASML ships today is an annuity it collects on for two decades.
Installed-base revenue compounds independently of the equipment cycle. By 2028 I estimate it alone exceeds ASML's entire 2020 revenue. Estimates mine.
Valuation: what you pay, what you get
My €1,120 target is built from a 2028 EPS estimate of €38.50, a 29× multiple — in line with its 5-year median, no rerating assumed — and net cash. The bull case does not require multiple expansion; it requires only that the backlog converts and service revenue keeps compounding at its current 15% rate.
| Scenario | 2028E EPS | Multiple | Target | Return |
|---|---|---|---|---|
| Bear — China restrictions widen, memory slump | €29.10 | 24× | €720 | −16% |
| Base — backlog converts, service compounds | €38.50 | 29× | €1,120 | +31% |
| Bull — High-NA adoption accelerates into 2027 | €43.20 | 32× | €1,390 | +63% |
Probability-weighted (25/55/20): €1,076, +26%. The skew is the point: the bear case costs 16%, the bull case pays 63%.
How this thesis dies
The kill criteria are pre-registered. If any of the following occur, I exit — regardless of price, narrative, or sunk conviction.
High-NA slips. If cumulative High-NA shipments fall below 20 units by end-2027, the ASP-growth leg of the thesis is broken.
Service margin erodes. Two consecutive quarters of installed-base gross margin below 48% signals pricing pressure where I assume none exists.
A credible EUV challenger. Any working demonstration of a non-ASML EUV source at a customer site — from any country, at any throughput — collapses the terminal-value assumption. Monitored quarterly.
Bottom line
ASML is the rare monopoly whose pricing power is still accelerating twenty years after it was first identified. The market pays 28× next year's earnings for it — the same multiple it pays for companies with real competitors. I am a buyer up to €900, with a €1,120 target and pre-registered exits. The toll booth is open, and traffic is only going up.