Making a Change in My Portfolio at the End of the Year-ASML
Before you even start, this is Henry from the future, or at least, a future after I wrote the first 1/2 of this article. I put down my writing instrument (an old Mac) to go play tennis and then run. On the ride back, I got a notification that one of my favorite YouTubers, Joseph Carlson, had released a new video titled “I’m buying a new stock” or something like that. In horror, I watched ole Joe start explaining why he was buying this new semiconductor stock, ASML. I BOUGHT THIS STOCK BEFORE JOSEPH CARLSON RELEASED A VIDEO ANNOUNCING THAT HE WAS BUYING. I BOUGHT ASML OF MY OWN ACCORD. That said, he did explain well why you should buy ASML.
If you are a dedicated Pax Romana Capital reader, you know that recently, I have felt a bit, eh, about my portfolio. After selling out of Block, and a bit of Disney, and using those funds to purchase GigaCloud Technology, I felt a little better. I had resolved to hold on to Disney till the next quarter, even at a pretty small portion of my portfolio, mostly because I just did not have a stock in mind to turn that 9% of my portfolio on. I was fine with this arrangement because Disney is a pretty solid company, but I have kept my ear to the ground for better, higher-quality stocks.
Then, I found a stock.
I have been looking to enter the chip game for a while, preferably on the design side rather than the manufacturing, but ultimately, I was fine with either. While I generally do not rely on valuations too much, some of the valuations have been too excessive, beyond where I feel as comfortable. So, I have always just bided my time to an extent, and there have been other great opportunities that have taken my attention and money. And, in a way, I think I gave up a bit on being able to enter this industry that is guaranteed to print money as long as there are computers in this world.
I was reading Barron’s a week or two ago, and I was skimming through. The article was on the best deep-value stocks, and even though articles like that are usually pretty garbage, a fact that was highlighted when the first stock listed was Google, but I continued skimming and came across a company called ASML.
ASML is a Dutch company created in 1984. It is one of those that soared in price during the dot-com bubble and then took a decade-and-a-half to regain its price. Its market cap is about $280 billion, so it is certainly not a minnow in the semiconductor space.
As the chip business goes, ASML’s business is pretty simple. While the nitty gritty is pretty complicated, and you are more than welcome to do your own research on that count, I can simplify it down pretty far. Basically, there are these things called foundries or fabs. That is where companies like TSMC, Intel, and Samsung make chips. Companies like Nvidia design them, and companies like ^ actually manufacture them. But you need pretty advanced equipment to complete manufacturing, and that is where ASML comes in. ASML makes the equipment and sells it to the foundries, which would already be a pretty good business, but ASML has a monopoly on one specific aspect of manufacturing-EUV machines.
EUV machines are pretty epic, and ASML is the only one that can make them to the degree to which they are needed, as in, they are at the very least, half a decade ahead of the competition, if not a full decade or more. As this guy put it, “The devices achieve scientific awe by firing CO2 lasers through a single drop of tin up to 50,000 times per second. This produces an EUV beam, which is then guided through mirrors into a wafer, imprinting patterns within a quarter of a nanometer. The output is a semiconductor chip that is 6 times smaller in diameter than a strand of hair (5 nanometres) which can power the most complex technology in existence. Close rivals Canon and Nikon, who also provide photolithography equipment for the less advanced chips market, have tried and failed due to the prohibitive R&D costs of the technology. They’ve been forced to accept a lesser position in the market.”
Basically, ASML, through decades of R&D, billions upon billions of dollars, and hiring the best scientists and engineers, has made themselves the near sole operator of a crucial part of this manufacturing chain, a manufacturing chain that is only becoming more and more pivotal to the world because we will never, or at least in my lifetime, never stop needing computers.
And like I said, this company is pretty cheap. ASML trades at a 27 forward P/E, which is pretty cheap, compared to the S&P 500, which trades at a 23-ish forward P/E right now. Earnings and EPS are both growing at about 18%, earnings and revenue have excellent guidance all the way through the end of the decade, at 17% and 12%. In terms of efficiency, their ROE is at about 43%, which is insanely efficient. There are no real debt concerns, despite all of the money poured into R&D, with the company having more than enough cash on hand to handle the $4.3 billion in debt. There is no dividend either, which I am a big fan of. Their CEO has been there for seven years, and he is a physicist. He also led the EUV team for a long time, so he knows what’s up, and the wider management team is pretty well experienced. Also, the executives don’t get paid that much because they are European, so that is nice. Although talent scalping could be a fear, there is not (any) that much competition.
That other guy touched on Nikon and Canon sort of being there, but those guys are the equivalent of a five-store local chain trying to take down McDonalds. Also, I really thought they just made cameras, but I have been corrected.
Even if these companies catch up, say in five years, to the current models, which is insanely unlikely, ASML will have spent that five years improving their design. ASML has all the best engineers, scientists, and physicists working on this. They are not losing out on their giga-gigantic market share in this absolutely hyper-crucial part of the supply chain.
And this market is only getting bigger. Sure, it’s nice that there will be more and more computers, but every day, a new country gives a semiconductor company from their nation billions to create chip manufacturing capabilities. It is a national security issue. Who is going to be a crucial part of those foundries that are 100% going to be created? ASML will be. Oh yeah, and it costs $400 million per machine, and they are 100% crucial to any new foundry. Oh yeah, they also get a massive fee to maintain these machines once they’ve been installed, a subscription basically, because nobody else understands how they work. Twenty-eight percent profit margin.
Sure, they have to spend a ton on R&D, but that’s the price of admission, and it’s not crushing their revenue.
I funded this purchase by selling out of all of my Disney, some of my Microsoft (which took unrealized gain from like 150% from when I purchased in 2019 to 60%, which hurt), and some of my GigaCloud, just trimming a smidgen, just to have enough cash to buy as much as I want. That brings my cash on hand to like 20 cents. ASML is about 13% of my portfolio now, Disney is 0%, and Microsoft is 12%.
In short, this is an amazing company. Their moat is wide and deep, better than any other company I hold. Nobody is knocking them off their perch. They are trading at a crazy cheap multiple, especially for the industry. You can get access to one of the safest and most profitable industries ever. They are at an amazing price, and they are a super safe, super profitable company. You should 100% buy.
