This week’s newsletter will be relatively short, primarily because most details will be inside the report of our brand new Bull List addition, ASML Holdings.
I won’t discuss my portfolio moves this week, as I made none. The primary reason for this is I will be taking a position in ASML in a week’s time with the cash proceeds from the sale of my position in Automotive Properties REIT (TSE:APR.UN).
This will not be the entire capital I plan to allocate to ASML. Over time I will further bolster my ASML position with weekly contributions to my portfolio and possibly the trimming of other positions, I just haven’t quite figured out which.
Let’s get right into it.
We’ve added ASML Holdings (ASML) to the Bull List
One thing to note about ASML before I discuss my general thesis: This is a European company that trades in the US market as a New York Registry Share (NYRS).
These are different from an international company listing as an American Depository Receipt (ADR), which is the same product as Canadian CDRs we see from CIBC for those who want access to US stocks but in Canadian dollars.
The main difference you need to know is that NYRSs are issued directly from the company themselves, whereas ADRs are issued from a depository bank.
ASML Thesis
I have been waiting for an opportunity to enter the semiconductor space for quite some time, and the recent weakness in terms of ASML’s share price is one that I will be pouncing on.
The company manufactures photolithography machines. What do these machines do? They utilize a beam of light to essentially produce a blueprint onto a silicon wafer. Imagine a standard construction blueprint. Now, amplify the detail of that blueprint by 100x and reduce the size of it down to a wafer utilized in a computer chip. These machines are expensive, often in excess of $150M, and with a 90%+ market share on deep ultraviolet (DUV) lithography and extreme ultraviolet (EUV) lithography machines, companies are almost forced to head to ASML holdings to buy them.
This creates a reliable revenue stream for the company in terms of new orders and the maintenance of those machines. As demand for artificial intelligence and technology in general increases, ASML should continue to benefit from the maintenance of existing machines and the production of new machines. Although there is a chance technological advancement could disrupt EUV and DUV machines, we’re likely a ways away from that. And even if this were to be the case, I would predict that ASML would be at the forefront of that innovation anyway.
With the semiconductor industry expected to grow at a double-digit pace over the next half-decade, ASML should be able to continue to grow revenue and free cash flow by at least that amount, if not higher.
The company has fallen drastically in share price due to some global tensions between the United States, China, and Taiwan. However, I do not expect these issues to last over the long term, and I am more than happy to initiate a position. Considering the company’s economic moat, strong margin profile, and the overall growth of the semiconductor industry, it will be a position I am comfortable holding over the long term while withstanding potential volatility over the short term.
Read our full report of ASML
The portion above only represents my central thesis regarding the position I will take in ASML. You can read my main risk issues, valuation, dividend analysis, earnings commentary, and more in our full report below.
