ASML: Tariff uncertainty clouds near-term outlook but secular growth story remains

• ASML reported a strong set of results in 1Q25. Total net sales grew 46% year-on-year while gross margins exceeded guidance due to a more favourable product mix and meeting certain customer productivity milestones.

• ASML believes that 2025 and 2026 will be growth years. Total net sales for 2025 is estimated to be between EUR 30 to 35 billion, which translates to a year-on-year increase of 15% at the midpoint. 

• Potential tariffs and tighter export restrictions on semiconductors could negatively affect ASML by increasing costs and reducing revenue.

• Despite the near-term uncertainty, ASML remains a compelling long-term buy for its competitive advantage, growing installed base, strong balance sheet and sustainable earnings. 

ASML posts strong results but flags uncertainty over US tariffs 

In mid-April, Dutch semiconductor equipment giant ASML reported its first-quarter results, posting total net sales of EUR 7.7 billion. Of that, EUR 2.0 billion came from installed base management sales while the remainder came from net system sales. Compared to the same period a year ago, total net sales rose approximately 46% (Table 1). 

Table 1: ASML’s 1Q25 financial highlights 

Gross margin came in at 54%, exceeding both the company’s initial guidance and the 51% recorded in 1Q24. Although ASML shipped fewer systems this quarter, margins improved because of higher average selling prices thanks to a more favourable product mix (more high-end machines e.g. NXE:3800 sold) and meeting certain customer productivity milestones. 

The company also shipped its fifth high NA system (its most advanced EUV model to date), and now has these systems installed at three different customers sites. While still in the R&D phase at customer facilities, high NA system shipments are expected to continue and eventually transition into volume manufacturing.

Looking ahead, the management expects total net sales to be between EUR 30 and  35 billion in 2025, which translates to a year-on-year increase of 15% at the midpoint. ASML still views AI as one of the most important demand drivers as customers continue to add capacity. Revenue from services is also expected to increase as the installed base grows, and as customers pursue upgrades for their older systems. Based on discussions with customers, ASML believes that 2025 and 2026 will be growth years for the company. 

Possible drawbacks to be aware of

While ASML's recent results remain solid, management warned that the constantly evolving US trade policy adds to future uncertainty. Although semiconductor components and other electronic devices are largely exempted from reciprocal tariffs thus far, it remains uncertain whether the Trump administration will introduce such tariffs in the future.

If such measures are implemented, ASML could face negative impacts, given that around 16% of its net sales came from the US (based on 2024 figures). Additionally, tariffs would raise the cost of raw materials for its US based manufacturing operations, which will lead to leaner margins. 

In recent weeks, the administration has further tightened chip export regulations to China. Notably, NVIDIA announced a USD 5.5 billion charge related to its H20 processors, which now require license approval for export to Chinese customers. Similar restrictions on ASML’s DUV exports to China would undoubtedly have negative repercussions. 

Why ASML remains a long-term buy 

While there is much uncertainty about where markets are heading in the near-term, those who can look past the noise will recognise that ASML continues to be a compelling long-term buy. Here are a few reasons why. 

Tariffs or not, it doesn’t change the fact that ASML is still the only company capable of producing commercially viable EUV machines. This gives ASML an exceptionally wide competitive moat, as any chipmaker aiming to produce cutting-edge chips must rely on its technology. The company’s strong commitment to R&D and its relentless pursuit of innovation further reinforces its market dominance. 

As ASML continues to sell more systems, its installed base is growing larger by the day. This creates a tremendous opportunity for it to increase its installed base management revenue through servicing and field option sales – a recurring source of revenue that contributes to its long-term financial stability and growth.

While the rest of the world contends with the specter of a recession fuelled by the trade war, ASML continues to stand out with its strong fundamentals. The company maintains a healthy balance sheet with minimal debt and a net cash position, placing it in a solid position to weather potential downturns or a prolonged period of elevated interest rates. While the chipmaking industry is not immune to recessions, longer term structural factors - such as AI and digitalisation - should lead to sustained demand for semiconductors, a positive for ASML.

A compelling opportunity for long-term investors 

Since the beginning of the year, ASML’s (NASDAQ:ASML) shares have declined nearly 4%, reflecting the broader selloff in the global semiconductor sector. Despite the near-term uncertainty, we see this as an opportunity for long-term investors to buy in at an attractive price. 

Even after using more conservative estimates for its earnings, the stock is currently trading at just 19.5X 2027 estimated earnings, well below our assigned fair multiple of 32X. This translates to an upside potential of around 64% and a target price of USD 1,107 (as of 24 Apr 2025). This valuation underscores our conviction that the stock remains significantly undervalued at current levels.

Table 2: ASML shares are trading at attractive valuations 

Figure 1: Share prices are driven by earnings in the long run

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a NIL position in the abovementioned securities. The analyst who produced this report holds a position in ASML.