ASML

ASML (not ASMR you weirdo) is a company who's products we all benefit from. Some people know exists and very few know what's going on behind the walls of Europe's most valuable technology company. Almost every modern product has computer chips in it. From your rice cooker to your phone, chips are pervasive. Most computer chips wouldn't exist without ASML.

Today you'll have three big takeaways; what technology trends the chip industry thinks are important, a primer on advanced lithography, and why geopolitics is so important to the chip industry.

Basics

Is ASML even that important? If you've heard of them you may know they build machines for advanced lithography. Now you're probably wondering what is lithography and why do I care (don't worry, I felt the same).

ASML is a business based in the Netherlands, which makes machines for advanced lithography. Lithography is a printing technology, and stems from the world of art. It is how you stamp patterns onto a surface using a chemical reaction & light. The business' ability to etch patterns into sillicon is beyond anything anyone else is capable of.

Advanced Lithography is bends high energy waves through mirrors to cut patterns for computer chips. It is the bottleneck in making better computer chips. ASML's machines push the limits of physics, and build better lithography machines. Better lithography means smaller chips, smaller chips are more energy efficient, energy efficient chips have better performance.

As we've worked through a few times, computer chips and their component parts are the most important product on the planet. The United States and European Union have both passed export controls on the major chip companies, because they are so powerful.

Business

Sure, ASML is important... but I've never heard of it. Good, you probably don't know anyone with €200 million to spend on an Extreme Ultra Violet Lithography machine. Yes. These products are expensive... very expensive.

The business produced over €21 billion in revenue in 2022, up 14% from the previous year. The vast majority of its business goes to Asia (mainly Taiwan and TSMC). They produce a gross margin of 50% and expect to continue growing at around 14% annually. Most importantly, if you look at their free cash flow they produce € 7.2 billion. A big number.

What makes ASML so unique? First, they just make the best machines. They can etch smaller patterns than anyone else, and continue to make advances in the entire lithography process. The quality of their products is limited only by physics and research money, which they have a lot of.

ASML makes 2 main products, EUV and DUV machines. EUV (Extreme Ultra Violet) is the cutting edge that will push computer chips beyond anywhere they've ever been before. It uses light with 1/10th of the wave length than the previous generation and is being rolled out in 2024. DUV (Deep Ultra Violet) is the industries workhorse. It does the majority of the work on the chips.

Trends

Chip companies know what tech is coming next. They have to produce the physical products with chips inside of them, so they know where orders are going to come from.

ASML has a few segments they've identified as primed for explosive growth; Automotive manufacturing, Industrial electronics and Servers & Data infrastructure. Each of these fit into one major theme that will pervade across the next decades; Artificial Intelligence at the edge.

Most devices are severely underpowered. They use low power microcontrollers, with limited memory and no operating system. So you have to run everything on a server. That is expensive and creates privacy risks because all data is sent back to a data center.

And as chips become better and internet becomes accessible everywhere, it will become easier to run larger compute loads on device. That means that individual devices can run a Machine Learning model specific to their use case. An example of this is a production line, which learns to predict its output and when it will break down.

AI computation on a device itself isn't just for big machines with high powered computers. Your wearable devices will soon be able to compute on the edge. This is important because you'll get access to fast Machine Learning, and protect your privacy.

Risks

Because of how powerful the potential of improving computer chips, governments have begun expanding their reach into the industry. Just last year the United States passed the chips act, which was essentially an act of economic warfare against China.

It cannot be overemphasised how important the chip industry is in today's world. We normally think of chips as the things that power our computers. One of the fastest growing segments in the next years will be data centers. Data centers are basically farms of computer chips. The entire internet runs on chips. The most advanced AI systems and the weapons systems that fight the next wars are all regulated by chips. Important, if there is one thing this industry is, it's important.

This means that governments feel the need to step in and understand exactly what products are going to what potential adversaries. In ASML's case, the Dutch Government has created export controls to exporting the most sophisticated Lithography machines to China.