Key insights
- The author questions ASML's high valuation (60x P/E) despite its strong business fundamentals and monopoly in EUV lithography. The concern is that the current price already reflects peak growth expectations, leaving little room for error. While ASML's technology is critical for advanced chip manufacturing, the author suggests the market may be overly optimistic about its future growth trajectory, posing a downside risk for US equity investors.
I've been sitting on the sidelines on ASML but am wondering if I'm missing something. Would love the community's input.
The bull case is obvious (and I agree with it):
- Monopoly. ASML is the sole commercial provider of EUV lithography machines. Every advanced chip in the world (AI accelerators, HBM memory, leading-edge logic) is physically impossible to manufacture without their machines. There is no meaningful competitor on any 3-5 year horizon. China's homegrown program is estimated 5-10+ years behind. * The business quality is exceptional. ROIC has averaged ~80% over the past 5 years, hitting 102% in FY2025. Balance sheet is essentially debt-free (Debt/Assets ~5.6%). They returned $8.5B to shareholders in 2025 while fully funding their own growth. * Demand is real and contracted. €38.8B backlog, €46.5B remaining performance obligations, €19.4B in already-received customer down payments. SK Hynix signed a $7.9B EUV order through end of 2027. Memory customers are reportedly sold out for the rest of the year. * The installed base business (service + upgrades on deployed EUV machines) is growing ~24% YoY and is recurring. This is a compounding revenue stream that gets larger every year just because ASML keeps shipping machines. * Revenue reaccelerated in FY2025 (+15.6% YoY) after a 2024 pause (+2.6%), and Q1 2026 came in at +13.3% with gross margin at the high end of guidance (53%). Management raised FY2026 guidance to €36-40B.
Here's my problem: the price.
The stock is sitting at ~60x GAAP P/E near all-time highs, having gone from $679 to ~$1,566 in about 10 months. The P/E was ~32x a year ago. That re-rating happened while 2024 EPS actually declined year-over-year.
At 60x GAAP P/E, the market is embedding roughly 20-25% annual EPS growth sustained for several years. ASML's historical 5-year EPS CAGR is ~22%, so the price essentially requires the company to run at maximum historical pace with no deceleration. And even in the bull scenario (FY2026 EPS ~€29-30, 50-60x P/E), you're looking at something like $1,700-$2,100, call it 10-35% upside. Meanwhile Q1 earnings beat + guidance raise actually caused a 5% single-day drop, which tells you the expectations bar is already priced in.
The risks I see:
- MATCH Act: legislation that could eliminate DUV sales and potentially DUV service revenue to China. China is ~20% of ASML's guided 2026 revenue. Management says the €4B guidance bandwidth accommodates export control uncertainty, but a stringent outcome could shave €5-8B off annual revenue, and the non-China DUV market was apparently already soft in 2025, masked by China outperforming. 2. Gross margin is stuck at 53%. Management's 2030 target is 56-60%, but the trajectory there depends on High-NA EUV scaling to high-volume manufacturing at multiple customers, and on the installed base mix continuing to grow. TSMC already announced they're delaying High-NA adoption to 2029. That 56-60% target looks like a 2028-2030 story at best, and it's not visible in the near-term numbers. 3. Multiple compression risk. Even if the business delivers exactly as guided, a re-rating from 60x to 35-40x while EPS grows 10-15% could mean the stock goes nowhere for 2-3 years. That's the "time correction" scenario.
My question to this sub:
I understand why ASML deserves a premium multiple: the monopoly is real, the compounding installed base is real, the AI-driven capex cycle is real. But I can't figure out what I might be underestimating that would make the current price look cheap rather than fairly valued at best. Is there a variant perception here I'm missing?
Is the IBM recurring revenue more valuable than P/E-based analysis captures? Is the High-NA ramp going to be faster than I think? Is the MATCH Act risk overstated?
I'm genuinely trying to figure out if there's a reason to buy today vs. wait for a pullback or a negative catalyst that creates a better entry. What am I missing?