Chit Chat Stocks - ASML in 2025 With Leandro From Best Anchor Stocks

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Starting point is 00:01:44 Welcome into another episode of the Chitchat Stocks podcast. My name is Brett Schaefer, and as always, joined by Ryan Henderson. Today, we have a recurring guest joining the show. It is Leandro from Best Anchor Stocks, who actually has a new podcast, also called Best Anchor Stocks, that you can listen to wherever you get your podcasts, covering a lot of... I think people that listen to our show will enjoy that as well, talking to a lot of really good fund managers, a lot of legendary investors, getting some fantastic interviews, and those come out on a semi-regular basis. On the Chit Chat Stocks podcast, Landry's come on before to talk Constellation Software, talking John Deere, actually, one that maybe people wouldn't think

Starting point is 00:02:37 about for something that is a sexy stock to talk about on a podcast, but one that I think was quite interesting. And we've also had him on before to talk ASML. It's been one of our most popular episodes. It's a company that people seem to be fascinated about. And we thought a couple years later, we would do an update on ASML when it has been in a little bit of a downturn and right after its 2024 investor day. So with that introduction, Leandro, we talked ASML a few years ago. What has happened to the company since then? Thank you guys for having me. It's great to be here again.

Starting point is 00:03:19 I think it's actually the fifth or the sixth time I'm here and it's always great. So we recorded the episode, I think, around July 2022, right? So a lot of things have happened since then. And just to name a few, for example, that year in summer, I think it was when ASML unveiled this medium and long-term financial objectives. Actually, it was in November that year. And that was basically the first time that ASML was giving such long-term guidance, right? They were giving objectives looking to 2030, right?

Starting point is 00:03:58 We also had the artificial intelligence boom. I think that's been the buzzword. artificial intelligence has been the buzzword for in financial markets for for a while now and obviously we'll talk about it later probably but the news for asml is maybe that it has not translated as people expected to its financials this ai boom then we also had intel's downfall and, to a lesser extent, Samsung's downfall, virtually making TSMC the only credible buyer of ASML's most advanced tools on the logic side, right?

Starting point is 00:04:39 The company also has memory customers, but on the logic side, TSMC seems to be the only credible buyer right now. Then we also had the Chips Act being signed into law. I think that happened actually shortly after we recorded the episode. That happened in August 2022, and the episode was recorded a month earlier. And then we also have had more export controls from the US. So a lot of things have happened.

Starting point is 00:05:10 And actually, it's interesting because I always say that long-term gains are the output of two things. One is finding a good investment, and two is being able to hold it for a long time. And obviously, the amount of noise a company gets helps with the second thing here. And when I was reviewing my notes for this episode, I realized that ASML has, in fact, been quite a noisy company, right? I mean, I didn't expect less when you're a monopoly in one of the most important or critical products in the geopolitical landscape. yeah i guess i forgot to even mention or think about the chips act maybe we'll talk about that if we can in a follow-up although that's you know there is just kind of the political uncertainty

Starting point is 00:05:56 with that let's just start out with the one that's on everyone's mind uh the ai craze what is the impact of ai been on the company are they as you mentioned here they may not be benefiting as much, but are they a beneficiary? And is that why I get, you know, it's a hard question to ask, but is that why the stock is in maybe, what is it, a 25% drawdown or something like that? Well, it's actually a fair question. I think the market probably got spooked by the fact that, among other things, that ASML is not benefiting as much from AI, especially when you're seeing companies such as nvidia or tsmc benefiting directly i think that asml is pretty much going to be a beneficiary of any long-term technological trend but this doesn't mean that

Starting point is 00:06:51 the cycles are going to play out uniformly across the supply chain right the semiconductor supply chain one of the reasons is that nvidia when there's a new technological trend they basically can scale up pretty fast right um because they are basically selling designs they are not manufacturing tsmc to a lesser extent can also um expand faster first because they probably don't operate at 100 capacity in any given year so you can go to to a higher capacity you can also raise prices which is something that nvidia has done and tsmc uh is has also done so then they they benefit quite let's say automatically right while asml on the other hand maybe there's a lag because customers have to see that first that the trend is durable and once that trend is durable then

Starting point is 00:07:45 they have to make the decision to invest in capacity and then they have to build that capacity right and those are things that take time uh so it's i think it's normal to see a lag and not just in asml right i think uh i saw yesterday a chart where you could see that semi-cap uh companies are trading at uh relative lows compared to the semiconductor uh index and i think i think was the socks so that's probably already a testament to what i'm saying here right um some companies have benefited massively other companies have not and are waiting to uh to see that benefit and if you join to that fact uh that the rest of the market right is in a is in a downturn or getting out of a downturn then obviously everything everything is about ai uh and if it was if it were

Starting point is 00:08:41 not for ai maybe tsmc would not be reporting such stellar numbers or or nvidia for that matter right So they are, let's say, let's say this way, I don't want to be misinterpreted, but maybe they got bailed out by, by AI, those companies. Whereas in Semicap, when I was going to say the downturn would have been worse in 2022, throughout 2023. That's it. So, so some companies got bailed out, but in other companies, as the lag is there, then they are basically suffering the downturn. and another thing that i would say um it's that ai will eventually require more advanced chips right right now there's a temporary solution because they're still not uh like you cannot implement the roadmap very uh the technological roadmap so fast so now what they are doing in the data

Starting point is 00:09:39 centers and asml explained this during the investor day is that they are stacking chips together to get more computing power, right? So it's a temporary solution. Instead of getting more advanced chips, which you don't have access to, because for example, high NA is still in early phases of deployment, they are stacking chips together to get that computing power. The problem is that this is very energy and cost intensive. So probably the solution will be temporary. But over the long term, you should see that stacking being replaced by more advanced chips made with among others asml systems and something that that that's probably the direct benefit right and something that people don't tend to think about and i think asml's former ceo peter wenning

Starting point is 00:10:27 he was very clear about this they are always let's say they write technological trends on the back of morse law because the more you drive down the cost of technology then the more possibilities you can get in new technological applications, right? When technology is very cheap, advanced technology, then more people are going to invest in it and to drive new applications. And I think AI is another example of this, right? AI is going to benefit ASML directly through several applications, but at the same time, AI is going to facilitate the development of other applications that might end up benefiting ASML, most of which are not even present today, right? But they will be in the future.

Starting point is 00:11:11 Okay, it makes sense. The other thing I think a lot of people think about when they hear ASML is kind of some of the geopolitical controversy slash concerns that are going on today. one in particular to call out is kind of china versus the u.s how has i guess has there been anything material that's come out of kind of the china versus u.s trade relations and um how might that i guess relationship affect asml's growth moving forward well i think geopolitics when you are a monopoly in in one of the most critical products in the world especially for for defense um it's going to be the eternal debate right uh i mean if you are this is actually a trade-off right if you are a very important company in the world then you'll most likely be subject to some sort of geopolitical tension especially when most of the supply chain is in

Starting point is 00:12:10 one side of the world and not the other um so i think there are several um ways to look at this First, on EUV, right, EUV has been, exports have not been allowed ever to China. So the only way that I see that geopolitics could impact this side of the business would be if China comes up with something similar to EUV so that the advanced chips that they have at home, they can make them with their own systems, right, instead of having to get them from abroad. But I think that's a remote possibility. I mean, I think the probability of that happening is low, at least over the next decade plus.

Starting point is 00:12:56 You see a lot of news claiming that China has achieved a five nanometer chip or whatever. But what matters here is not being able to manufacture one chip, right? It's being able to do that at scale. And that is what's actually difficult, right? So it's not that ASML is able to manufacture or you can manufacture a two nanometer chip with ASML's tools, it's that you can manufacture lots of them in a short period, right? So then it makes economic sense to do so. And I mean, I think it's a very, it's a long term risk, but the very long term, right?

Starting point is 00:13:37 And the fact that China is able to disrupt ASML's EUV business, especially because when they catch up to EUV then ASML will probably be in higher EUV that would be in high volume manufacturing and there will be steps they will always be steps ahead then then if we look at the DUV side of the business right ASML's China business is mostly DUV which is deep ultraviolet they have less advanced systems than EUV and then you have two types which are dry and immersion duv immersion duv is more advanced than dry duv so this is using more mature chips or in more mature layers that are included in advanced chips right i mean semiconductor chips are not made of just one layer they are made of many many layers and some of those layers are going to be uv and

Starting point is 00:14:27 some are going to be duv um can china come with a credible competitor to asml's duv well they can and this can evidently be a headwind. What I think it's important to understand is that the geopolitical battle has created sort of a, let's say, geopolitical dependable capacity, which means that the West is unlikely to buy chips from China to a great extent, right?

Starting point is 00:14:58 Because you might get disrupted in the future. And China at the same time is probably, if they have a viable competitor to ASML is unlikely to buy chips from the West, right? Because they know that in any given moment, your business could basically zero, right? If you don't get access to chips. But it's evident that the geopolitical battle is getting more intense, right? We've gotten more export restrictions lately. And I don't see how that's going to really change with Trump.

Starting point is 00:15:30 But at the same time, what ASML has always argued is that they don't really care where the production of the chips or the manufacturing of the chips happens, right? They are guiding based on global demand, regardless if that demand is built in China, Taiwan, or in the US, right? The industry is going to need to manufacture the number of chips that the world demands. So that's basically how they guide. So I think it's obviously a risk, but at the same time, it's a risk that shows how important this industry is in the world. yeah and correct me if i'm wrong but if say china just completely gets cut off from asml's business doesn't that give them a much longer runway of demand in europe japan south korea and the united states where that's going to be replaced because

Starting point is 00:16:35 the demand on the consumer end and the commercial end and the cloud computing end isn't really going change you know from nvidia and all those customers yeah i think i think it's a fair point i mean if if they get completely shut off without having a credible competitor then yes i think it would it would be a tailwind for asml right because that capacity will be will be built elsewhere to satisfy the demand and in fact it's currently being um um put into into the ground right now i mean there has been there have been well maybe we can talk about the chips act but um governments worldwide are incentivizing companies to build domestic manufacturing and that's good for asml right because that is going to lead to inefficiencies obviously because

Starting point is 00:17:25 the the semiconductor supply chain is very global and it's very efficient the way it is so when you break that let's say globality then you're going to create inefficiencies but that for asml means that they're going to sell more systems even if those systems are running at lower capacity right that's what in theory should happen but with geopolitics it's always tough to know what will happen yeah that's definitely true anyone that has a crystal ball and what's going to happen with china and the u.s well come talk to me we have one more before we go to another topic which is reshoring we had a couple of good twitter questions regarding china and you hit most of them but i have one follow-up i think a lot of listeners have on their minds and if they probably

Starting point is 00:18:10 seeing this if they're not following the company super closely so someone asks why were china sales so high in recent years is it due to companies stocking up ahead of more restrictions and will china sales fall off a cliff when it stops and i think a lot of investors are worried about that final part okay so there was definitely a pull forward right uh with china because the chinese customers were probably front running uh the the export restrictions right and and ordering just to be able to bypass those restrictions at the same time there's also there's also been let's say a timing aspect to it right asml has had a huge uh order backlog and during the early pandemic days that backlog was being let's say satisfied with customers from

Starting point is 00:19:10 the west so now that customers from the west started being a bit more conservative let's say with the orders asml basically backfilled that drop in demand with chinese customers right so they were basically satisfying orders that they could not give to chinese customers in the years prior and they were satisfying in them now at a at a faster pace i think that revenue well i don't think i mean the thing that is that i don't understand that this is top of mind for of investors like for investors because asml has already said that sales are in china are basically going to fall from a cliff right um they they had 50 i think china revenue uh 2024 and they expect that or 2023 i don't remember well 2024 i think and they expect that to go down to 20 by next year

Starting point is 00:20:10 And again, it goes back to the point that I was making earlier. They don't really care where the demand is coming from. They don't care if the mix is, let's say, 50% China, 50% Taiwan or 50% the US. They care about the end demand. And they know that China is probably going to fall off a cliff, but at the same time, they know that the U.S. is going to start to come up strong, right? Whereas historically, it had not been strong because they are making investments in PAPs. So while I think that obviously is something to look at and to have in mind, I don't think it's that important as many people are claiming to be, right? And let's not forget that they are saying that China revenues are going to come down from 50% to 20% of overall revenue, but they are still within the guidance ranges that they've given. And also they have not lowered, they actually maintained 2030 guidance, regardless of the new export restrictions. That just tells you how they guide for the businesses based on demand, not the location of supply. this might be a dumb question but the is there any inventory risk for asml or are all these

Starting point is 00:21:25 machines essentially made after orders are placed no there's there's no inventory risk right now i mean they are operating at full capacity you can have an inventory risk in the future right because they are expanding capacity and they are getting ready to um to manufacture more systems in the future but right now with the backlog that they have uh there's there's no inventory risk okay one uh one big theme that a lot of people uh have been discussing in the semiconductor semiconductor industry overall has been this reshoring narrative where we're seeing that a lot of production a lot of investments are being made in production here in the united states um i guess question is how will these new factories that are being built impact asml um

Starting point is 00:22:13 and are we seeing any of that yet okay so more more factories obviously more fabs will lead to more equipment demand it's not automatic it's not automatic right i mean uh it's how it has been deferred uh several times especially by customers different to tsmc right i think samsung was looking for customers for its us fab and as they are not finding customers then they are not they are delaying their their efforts that's the most obvious way right in how it benefits asml you need more systems then from then i don't think that i mean if tsmc's let's say venture into the u.s works i don't see why they won't build more capacity in the u.s in the future maybe not now right but because they are doing like sort of a pilot uh building a fab with a

Starting point is 00:23:10 money but if it's profitable and the returns make sense i i don't see why they you would not want to de-risk your business by building more more abroad and then also asml also benefits from the opex of these fabs not just the the capex right because they are they have the install installed base management segment which like you conduct software updates you conduct maintenance So all the install base that gets installed today has an ongoing benefit for ASML in the future. So that's the two ways in which ASML can benefit. But right now you are seeing some of these orders in the backlog, but it's not really driving meaningful revenue for the company yet. And they, well, we'll talk about Intel later.

Starting point is 00:24:03 Let me ask this one. there's been a debate on whether you know i guess not really a debate but there's kind of two conflicting headwinds and tailwinds there's the tailwind of ai which is in an upturn but i think a lot of people are forgetting or not seeing that almost everything else in the industry has gone through a major cyclical downturn how do you look at this you know two conflicting kind of trajectories uh for demand in estimating you know future earnings power for asml is it almost make you optimistic that everything besides ai is doing so poorly because eventually that's going to to recover well it's a good point first what i would say is that a lot of people tend and i was

Starting point is 00:24:55 one of these people right uh to over obsess with cyclicality right um i say oh look these companies are cyclical so they should be worthless well i actually think that if you're cyclical you should be worthless if you don't comply with two things right one is that you can weather a downturn because obviously you're going to be cheaper because there's a risk that in the next downturn you're going to go bust. And the second one is that the industry is secular, right? Even if it has cycles. And I think the semiconductor industry is a good example of this. So even if the industry is cyclical due to the CAPEX cycles, over the long term, it has proven to be secular, right? So I don't really care about how the different, let's say, cycles are playing out so long as ASML

Starting point is 00:25:45 ends like or the next peak is above the peak of the prior cycle i think that's going to be the case right and as you say i think it's actually maybe good news that the cycles are kind of asynchronous right um maybe not so much for asml but uh for for ai because if ai starts let's say investments into ai starts falling in the future right then maybe you have the rest of the market helping uh helping you and actually this is a different company but that's why that's what what what's happened in texas instruments for example automotive and industrial has been very strong with the rest of the end markets doing poorly now automotive and industrial are not doing as well and the rest of the markets are recovering and normally the cycles tend to be

Starting point is 00:26:40 more let's say synchronous right they tended to go in the same direction but obviously covid just basically put a a lot of volatility into everything and and maybe not comparable to to past cycles but that what i would say is that cyclicality should not be seen as bad so long as a company can survive it and and also i tend to be to look for companies that are in control of their destiny and i'll say in control to to an extent right i mean the asml is not in complete control of its top line right it's subject to to the cycles even if it's had if it has been someone consistent uh growingly consistent consistently over the the past uh few years that was because the backlog was huge right so they were they were basically just satisfying

Starting point is 00:27:34 the backlog i think asml wants capacity equals demand is a cyclical company i mean you are you are exposed to the capex of your customers and that capex is is is going to be uh volatile but in terms of margins i think asml is much more in control of its destiny right because they are they have a monopoly and they are selling to customers well they have a critical product um they have the monopoly of that critical product and they are selling to customers that are very very profitable so i think they can more or less take their fair share but that that's what what i would say about the the current cycles and i don't i have no clue when the cycle will inflict uh either the the rest of the industry will inflect upwards and when ai will inflect downwards what i would be careful

Starting point is 00:28:22 is thinking that ai is going to be secular unlike other technological shifts right because i think that history has proven that that's probably not the case. find reports on companies we've already heard of. Try it for yourself. Simply go to joinyellowbrick.com slash chitchat and search a company or ticker you are interested in. You are bound to find a great report on just about any company. That's joinyellowbrick.com slash chitchat. Weren't people saying that in 2021 as well, that semiconductors had escaped cyclicality? Maybe I'm misremembering that, but I thought I saw it. That's actually, that was the case. And to be fair, it seemed like it, right? Because the supply chain was so constrained that these companies were basically bottlenecks at every step. So it seemed like, oh, hey, look, there's no cyclicality here. But at the end, what happened is that they were basically satisfying an unmet backlog through the pandemic.

Starting point is 00:29:51 Yeah. Touching on your point here, Leandro, I've pulled up operating margins for the last 20 years for ASML. And aside from 2009, every single year, ASML has had positive operating margins. And for the last 15 years, it's been basically north of 25%. And there's certainly been periods of higher demand than others. So yeah, touching on your point there, it seems like they've been able to be quite profitable through it and i also think that that's a good point and i also think that when you are when you think about a competitor for asml they are probably not in the same scenario as asml regarding cycles right if someone tries to mimic what asml is doing then you're probably going to be more exposed to cyclicality because

Starting point is 00:30:40 you are a smaller company i mean asml if you read any of asml book i think there's a book called asml architects which is about the history of asml it's basically a miracle that asml is like uh a company right right now it almost went bust like five times in the early stages right and it got saved by um phillips and another investor so i think that cyclicality also makes it tougher for smaller competitors to come into the market makes sense on uh even though we just kind of mentioned how it's less cyclical we uh or i guess the profit margins are manageable despite the cycles let's talk about the recent uh top line numbers new orders fell last quarter um and it seems like it's very easy and i guess this is probably the same with a lot of companies for

Starting point is 00:31:38 investors to extrapolate out any kind of current trends um longer than maybe they should i guess what happened with with the orders to begin do you think that's a long-term concern at all and then why are quarterly figures maybe not the biggest deal for asml so several things to to unpack here first i wouldn't say it's like orders falling is a very like big concern right i actually remember that one or two years ago exactly the same thing happened orders were down or they missed um the market's estimates by a mile and everyone was saying like this is very worrying and then asml came the next quarter with a record order number so quarter to quarter orders are going to be lumpy right and more so now that lead times are coming down right i mean if i'm a

Starting point is 00:32:36 customer and i'm and i know that the lead time for an euv system is one year and before it was two years i know that i don't have to put an order right now because probably i'll be able to put it if i need the system in two years right because i'll be able to put to put it next year during the pandemic as lead times were so long a lot of customers were putting in orders just to secure that supply whenever whenever it came and also we have to understand that asml like the the average selling price of asml's products is pretty high right i mean slower for duv but it's very high for euv um i think it's around well higher than 200 million and i think the new uh high na euv is going to be north of 300 million per system right so when you get an order or two orders deferred

Starting point is 00:33:32 let's say a couple of quarters or to the next quarter then obviously you're going to feel that in the order numbers right i mean uh that's logical and in this case it's not just that obviously is that customers are actually deferring the orders because they are seeing that the environment maybe is not as good as the as they expected or some of them as samsung is pushing out their plans to build the fabs in in the u.s right so if samsung expected to build a fab in 2025 then the order should be already in asml folks but if if samsung doesn't expect to do that then they can defer the order so i don't think it's worrying long term and one of the let's say data points that you can look at to see that it might be a timing reason, right, is that

Starting point is 00:34:22 ASML lowered the 2025 guidance, but they maintained the 2030 guidance. So they basically expect similar demand, just not coming before or in 2025. And then that's also the main reason why I don't think that quarterly numbers are that important, right? The high average selling prices. And also, ASML has, let's say, a revenue recognition policy, which is fast shipments, right? Well, how it works is that they cannot recognize a system as revenue, or in the past, they did not do it like this, until that system is validated by the customer on site. So they might have shipped the equipment, but they are not going to recognize it into revenue until the customer has accepted that the system works well, right?

Starting point is 00:35:17 Right now, that was how it worked at the beginning. Now they are trying to change that because obviously they've gotten better in doing the systems and customers trust that these systems are going to work. So they are shortening those periods. but what i'm trying to say here is that you can have let's say three uv systems shipped this quarter but not recognizing to this quarter's revenue right and three uv system let's say if it's ina uv you could have like almost 1 billion in revenue that's missing just due to timing reasons right that's why i don't think that quarterly numbers are all that important uh for asml or imagine a customer instead of putting the order in before q4 like and in q3

Starting point is 00:36:04 he does it the first week of q4 well that's going to impact your numbers but it's not meaningful for for the business right a concern would be almost a multi-year downturn in orders it's not one quarter just given the nature of the bulkiness of one of the orders can impact it that makes a lot of sense let's transition as we go further into the interview about asml's future the first question i have is on the technology this is something that you know you knew exactly what the future of their technological stuff would be yeah we wouldn't have to do this podcast you could bake you know give them you go work for them and and uh you know make a lot of money that way but in your humble opinion can the technological moat continue to widen and any update on these

Starting point is 00:36:59 high na machines that i think are first going to intel and how it can impact the business well i think the technological mode will actually widen more um and the reason is pretty straightforward right like i said before it's not about being able to manufacture these chips but about being able to manufacture these chips in a productive manner, right? And at scale. To achieve this, you probably need to have a lot of volume

Starting point is 00:37:26 going through your system so you can learn from your manufacturing at scale. So as long as ASML retains most of this volume, it will be very tough to a competitor to catch up because ASML is going to have more volume to feed it back, let's say, to the system So the systems get better, right? Either in yield or in cost savings, in water or in energy.

Starting point is 00:37:57 So, and also we have to consider that customers, ASML's customers, well, like TSMC and other customers, they have pretty good margins, right? So they get a high value from ASML's systems. it's unlikely and they know that they work it's unlikely that that they would give meaningful volume to another competitor unless they like unless they can demonstrate that it makes sense to do so right so and that this is also the reason why asml could in my opinion extract more of the value of the value chain right they have a monopoly customers have high margins they could

Starting point is 00:38:41 let's say squeeze uh customers margins but at the same time asml is not stupid and and they know that if they do that that's an incentive for customers to try to fund other um let's say other methods in fact when asml was starting out asml came to be thanks to early investments by its customers right like tsmc um i think intel was there too and samsung so i think the the technological mode is going to continue to to widen especially because in the investor day they talked about this they talk about the concept of commonality asml is increasing the commonality of its systems so for asml to go from euv to high naeuv and then to hyper naeuv it's easier right because a lot of the parts are common across systems but a competitor has to start has to

Starting point is 00:39:42 start from zero so it's not like you i need to copy uh high naeuv i need to copy everything that's come before that until i can get to that so i think it's a pretty wide uh technological mode. And then on new products, I think the next decade is going to be about high NA EUV productivity enhancements, right? So making high NA EUV more productive. And then maybe in 10 years, we start to see something related to high NA EUV. I was actually surprised that in the last Investor Day, management was quite confident in that they'll solve Hyper and AUV. The problem with Hyper and AUV is not the technology as such. I mean, they are quite confident that they will be able to have the technology. The problem comes, how cost effective is this technology, right? Does

Starting point is 00:40:37 it make sense to build this technology? Does the returns make sense for us? Does the return make sense for our customers? So that's the main problem. But I was actually surprised to see how confident they were that beyond let's say 2030 they we might start seeing some talks of hyper and auv which would be great right yeah there's there can always be a next step uh forward this is one of those businesses where the technology if it can just get better and better and better and better well hey look that's increasing your runway for growth one concern that some of the smart, you know, semiconductor focused analysts have touched upon. And I don't know how comprehensive is the wrong word, how consistent everyone is

Starting point is 00:41:28 in this belief. But there are some people that believe out there that lithography as a percentage of semi-cap spending might go down. And there's a risk that the EUV systems were kind of the peak around that what are your thoughts on this in general is there any predict predictability to this is it something that asml has talked about how do you look at that in relation to the company and whether it's a risk for the business yeah so um i'm going to start by saying that i have no clue whether lethal intensity will go up or down in the next 10 years uh i mean it has gone up in the past especially when asml released euv right because euv got widely adopted in the industry and obviously it was expensive so then you had a

Starting point is 00:42:09 lot of capers going to EUV. High NA EUV based on the early trials and what customers are saying is adding value to customers, right? So I think that's an argument against lethal intensity. At the same time, I think an argument for lethal intensity is that the increments are getting smaller, right? It's becoming tougher to advance more slow through shrink, right? That's why you're seeing the industry transition to other methods like stacking, right? Like 3D structures. But lithography is still adding value, right? I think you could make, let's say, a case for, hey i'm sure it's peak lethal intensity if um high na uv was a flop right because it's like okay this is not working we need to look for other methods but high na uv seems to be working and

Starting point is 00:43:11 it seems to be working even now that it's not like you still have a lot of productivity enhancement uh to come right so i don't know if it's going to uh like if we are peak lethal intensity But at the same time, I don't think it's that critical. I mean, ASML, even if the semiconductor industry keeps growing, then Capex is going to continue growing. And if ASML gets, let's say, a few percentage points less of that Capex, well, it's still going to get meaningful amounts of revenue, right? At the same time, ASML knows that it's adding value with their new tools. So I don't see how management is not taking into account lethal intensity when setting the price, right? I mean, you basically can set not whatever price you want because it has to make sense for customers.

Starting point is 00:44:09 But if you expect lethal intensity to go down in the future, but you know that your product is adding a lot of value, then most likely you are going to take your fair share of that value, even if you're selling less systems, right? So that's how I would look at it. And how I said before, when we were talking about AI, even if it's peak lethal intensity, everything that helps the semiconductor industry bring the cost down and continue implementing, let's say, more slow, it's a potential benefit for ASML in the future, right? Because, I mean, that will lead to future applications, which will still need lithography. So it's important to say that the new methods that are being discovered for, well, discovered, implemented in semiconductor manufacture complement lithography, but they don't substitute, right? So that's also important.

Starting point is 00:45:09 So ASML is always going to have a key spot in the value chain. All right, listeners, we've got a new sponsor here on Chit Chat Stocks. The name is Blue Chippers Club. Blue Chippers Club was recently started by two friends of ours with the goal of building a tight-knit community of stock-focused investors. Inside this awesome community, everyone gets to share and break down their portfolios with each other, participate in weekly calls, and compete in fun portfolio performance competitions. I really like this idea and it's why we're promoting it here on the show. In fact, Brett and I are in the community ourselves and enjoy just how much value we get collaborating with other investors.

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Starting point is 00:46:31 Fund your account in five minutes or less at public.com slash chitchatstocks and get up to $10,000 when you transfer your old portfolio. That's public.com slash chitchatstocks. Paid for by Public Investing. Full disclosures in the podcast description. Okay. I'm looking out at revenue over the last decade and the growth has been lumpy. But if you look out over the last 10 years and probably even further, ultimately, revenue has grown at a nice, healthy pace on an annualized basis. It says here since 2011, basically 11.5% annualized rate.

Starting point is 00:47:17 Why would that not occur over the next 10 years? Is there anything that could potentially stop that from happening? Obviously, if there's a massive cycle, but I guess anything, what would be top of mind for you? I mean, I think there are lots of things that can happen. You have geopolitics. I mean, as we just said, lethal intensity, all of those are really unknowns, right? But then in the growth favor, you have the semiconductor industry is expected to grow significantly over the next 10 years. you also have asml actually implementing high na uv now so then that will be also a cross driver

Starting point is 00:48:01 and asml will also remain the backbone of lithography for less uh advanced chips right through through duv so i think that asml will continue to keep growing exactly at what pace uh i actually don't know um what i would say is that management has a track record of being conservative right uh i remember that many years ago they shared guidance and in an investor day or and they basically got laughed at because they were very optimistic and at the end it turns out that they were being very pessimistic so if you look at um management's guidance like how i see it is basically the the the range is very wide right so 2030 calls for revenue if i'm not mistaken between 40 and 60 billion so that range is is huge right but why is the range so large because

Starting point is 00:49:06 they basically don't know um where they're the cycle where the cycle will be right it's not the same to arrive at 2030 being the trough of a cycle or being the peak of a cycle so that's basically the um the argument be um behind that i i expect asml to grow over the next decade but i i think it will be continue to be cyclical right i mean growth is not going to be smooth even it's it has not been smooth in the past um but it has mostly trended upwards right i think we can have periods where you have revenue uh decreasing rather than growing yeah it's the nature of the cyclical industry they just had an investor day and i will mention then i just checked this uh as you were talking here you can find all the materials for that

Starting point is 00:50:02 Investor Day at our friends at FinChat.io. The slides, the transcript, the report, everything you could want on one handy tool. And you can check that out at FinChat.io slash chitchat, get a 15% discount on any paid plan and check out all those good tools. But let's talk about the Investor Day. You mentioned a lot of things already in this episode, but were there any big updates from the Investor Day that investors should take away from here? I think there weren't many big updates. I actually think it was a very good investor day just to understand how the business works, right? They maintained 2030 guidance, which I think was what the market was focused on, right? After lowering the midpoint of 2025 guidance, the market probably wanted to see that it was really a timing reason. And the way to see that was basically seeing that the 2030 guidance was intact. So they maintained that.

Starting point is 00:51:02 I think they did lower slightly the gross margins because they expect the product mix to be sort of different in 2030. And as I said earlier, what surprised me the most was probably, I've already talked about these things, but one was the confidence shown on Hyper and AUV. I think before this investor day, it was a possibility, but it was not being openly discussed as, hey, this is like the next decade, what we'll have. And also the explanation around commonality. I think that was also very important because also one of the interesting things, and it relates commonality and Hyper-NAEUV, is that they've built high NAEUV already to be able to build Hyper-NAEUV, right? So that brings the cost down quite a bit and also makes maybe the investment more worthwhile.

Starting point is 00:51:58 So that's also important, right? Because they need to invest less dollars. So then the returns can still be good, even if hyper-NA is not a massive jump with respect to high-NA UV. All right. Let's see, Ryan, do you have any other questions? Well, I guess, here, let's talk this one. The guidance, 2020, excuse me, 2030 guidance, they're calling for 60 billion in euros in revenue, 60% gross margins. I guess the big top level picture, what prevents this from happening?

Starting point is 00:52:37 What sort of pre-mortems are you looking at to say, look, ASML's consistent growth just stops sometime this decade? I think that the most evident one here is the cycle, right? I mean, what prevents ASML from getting to $60 billion is the cycle. Then you have lethal intensity. I mean, it's all topics we've talked about, but those are the obvious ones. And that's, I mean, the future is uncertain, right? And even for a company that is talking every day to its customers and knows the roadmap of its customers, they even give a pretty wide margin on those revenue scenarios. So the futures will always be uncertain, right?

Starting point is 00:53:23 So how I go about, and I think this is probably something that a lot of people ask themselves, like, how do you value this? How I go about this is basically I build two scenarios based on the 2030 guidance. I build a worst case scenario, right? And a best case scenario. So in the worst case scenario, I get the low end of the revenue guidance. It's evidently not a worst case, right? Because things could go worse than what management thinks.

Starting point is 00:53:52 But really, like in the context of guidance is the worst case. I get the lower end of revenue guidance that I get the lower gross margins, the higher OPEX expenses, and then I get to a net income figure. And in the best case scenario, I do exactly the opposite. So even you get a pretty wide range, right, in net income. I think it's between 14 and 24 billion. So then basically based on those two scenarios, I have two scenarios of exit multiples and I just consider that ASML is attractive when the worst case scenario is okay, right? I don't need it to be a double digit return in the worst case, but when I expect to not lose money in the worst case scenario and get a pretty good return in the high end scenario.

Starting point is 00:54:46 That's how I look at it. Obviously, in the future, you can also have a lot of technological applications that you don't think about today. And that 60 billion number could be higher. I mean, I think it's unlikely, right? Because ASML is capped by supply. So they cannot manufacture like scale super fast. but then maybe you don't get a higher number that's 60 billion but you get a higher multiple than the one you think you're going to exit at because there are a lot more opportunities going forward so that's how i that's how i think about it it seems difficult to model because of the wide range the wide range of possible outcomes i guess my question to you would be what would cause you to sell if ever would it be it seems very unlikely that there's any sort of disruption just seems like they have a massive technological advantage is it like purely valuation based actually um i i i was looking at an asml when it was above um 1000 euros not long

Starting point is 00:55:59 ago i remember looking at the valuation saying gosh this looks expensive right i mean maybe i should sell some of my position i didn't then the stock dropped like 45 from those highs and then i regretted it but then at the same time i thought okay i'm saying this because it has dropped but if it were trading at 2000 i will be like regretting selling right um i would consider selling asml if the valuation got crazy like 100 or if i saw that the geopolitical battle was actually like crippling the company which which can also happen right i mean you get you can get tied in between uh disputes uh not only with china but with other countries right um or maybe i mean i don't think that the risk for asml is that someone copies euv i don't think

Starting point is 00:56:56 that's happening i think the risk might be we talked about it but a new method that disrupts the way that chips are manufactured right that calls for lithography being basically a not a high value add step in the process i think that will also be a reason why i would consider selling But mostly right now, it would be valuation. Makes sense. As we wrap things up here and we end this episode, I want to close out with one question. And that's the management culture, the culture in general at ASML and the CEO change. What is your assessment of that?

Starting point is 00:57:40 How do you like this new CEO? Anything in regarding to that and kind of the qualitative aspects there as we wrap things up? It's actually funny because the CEO transition, it was announced one year earlier than when it happened. But a lot of people and even the market was like kind of surprised because I don't think ASML was all the time like reminding, hey, we're going to like have a CEO transition. They basically announced it one year before it happened and then it happened. So I think there's no problem there in terms of culture, or I don't think the CEO change, for example, is worrying, right? Christophe Fouquet comes from EUV, which is where the company is going, right, in the next phase. He was, I don't know what the exact title was, right, but president of EUV before becoming CEO.

Starting point is 00:58:37 And he's also relatively young, which I also think it's important, right? If you want to manage the business. I think ASML also tends to allow the CEOs to have, let's say, relatively long tenure. I think that's really important, actually much more than people think it is, especially in companies that have to make decisions that are so long-term oriented, right? You cannot have someone making long-term oriented decisions when you're having them in the role for two or three years.

Starting point is 00:59:15 Actually, I think that the average tenure in corporate America, I think it's around three years or four years, something like that, which evidently is going to lead to short-term decision making. So, yeah, I think, I mean, we have to wait and see what the new CEO does. He honestly has not started in the best environment possible, either for the company or for the stock. But I guess that we'll see if he endures through this and executes like they did in the past.

Starting point is 00:59:54 i don't think the ceo at asml is a super key position i actually think the cto is more important right but and that was martin van vanderbrink uh which also left the company uh so i think that's more important but at the same time he left because he was like working for asml forever so no no problems there he basically just went into retirement but at the same time um i remember watching a documentary uh an asml documentary where they said it's not like i mean it's very tough to copy asml because it's the systems are modular right so they are they are made of several modules that makes it easier to manufacture and also like to upgrade and change uh parts so they in the documentary one of the heads of the uh of like the technology

Starting point is 01:00:44 function said it's so difficult to to copy asml because basically nobody knows really why they why this works right so if you're building this module you you know that that module works but when all it all comes together it's sort of like it's not written in paper why that's going to work right so that's the beauty of asml so i i would be more worried about the departure of the CTO than the CEO, to be honest. All right. That's a great way to close things out. Leandro, if anyone is interested in any more of your work across the podcast, newsletter, anything Best Anchor Stocks, where can they find you? I'm on Twitter at InvestQuotes, and then you can find my investment research service at bestanchorstocks.com. And as Brett

Starting point is 01:01:38 mentioned at the beginning i also have a podcast i'm not as uh as a recurring publisher as you guys are i'm trying my best though um that's called best anchor stocks and you can find it on spotify and i also have it on youtube but uh i do not upload every episode to youtube as an advertising partner for the podcast we appreciate whatever you get out there you got something out there. I'm just going to tease some of it. Palantir was the latest episode. I guess that one is a popular company. Long Short Investing with George Lovatus from Upslope Capital. We have China Risk to Big Tech and Nintendo with Ryan O'Connor, fascinating investor, and plenty of other ones. And I think if we go back, there's actually a couple with some very famous fund

Starting point is 01:02:28 managers and hopefully you'll get some on there in the future as well. Thank you, Leandro, for joining the show once again. Hope the listeners found value out of this. Let's hit the disclosure. We are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan and I are any podcast guests. May hold securities discussed in this podcast. May have held them in the past and may buy, sell, or hold them in the future. Thank you everyone once again, and we'll see you next time. Thank you.

Chit Chat Stocks - ASML in 2025 With Leandro From Best Anchor Stocks

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