ASML's 2024-2025 Tailwinds
Note: I no longer write for Seeking Alpha, so all my technical-marketing-investor content will now be on SubStack. As a heads-up, all articles over the next week will be free to readers as an Introductory Program. Following that I will initiate a Paid Subscriber policy, so sign up now.
ASML overtook Applied Materials as the top WFE Semiconductor Equipment supplier in 2023.
ASML's strategic focus on high-volume manufacturing for TSMC's 2nm nodes presents a significant revenue opportunity for 2024 and 2025.
ASML's strong sales to China continue despite ongoing U.S. sanctions.
ASML's high backlog of EUV and DUV systems illustrates the strong demand for lithography equipment with minimal competition.
CY 2023 was an exceedingly strong year for ASML. I noted this in a February 13, 2024. ASML overtook Applied Materials (AMAT) as the top WFE (wafer front end) Semiconductor Equipment supplier in 2023.
Chart 1 shows revenue growth in 2023 over 2022 for the top companies. Not surprisingly, China’s Naura grew 41.8% YoY, well ahead of etch competitors AMAT, Lam Research (LRCX), and Tokyo Electron (TEL) (TOELY).
Chart 1
Biggest Opportunities for ASML
TSMC reported a 40% year-over-year revenue increase, reaching 673.51 billion New Taiwan dollars ($20.62 billion), outperforming market predictions. Profits also saw a substantial rise, climbing over 36% to NT$247.85 billion ($7.59 billion), exceeding forecasts. Earnings per share came in at NT$9.56, or $1.48 per ADR, both figures outpacing estimates.
Looking ahead, TSMC anticipates robust demand in the third quarter for AI and smartphones. The company expects third-quarter sales to range between $22.4 billion and $23.2 billion, representing a growth of approximately 30% to 33% from the $17.28 billion reported in the same period last year.
“Our strong performance in the second quarter was fueled by high demand for our leading 3nm and 5nm technologies, although it was partially offset by typical smartphone seasonality,” commented TSMC CFO Wendell Huang. “As we move into the third quarter of 2024, we anticipate continued strength in smartphone and AI-related demand for our advanced process technologies.”
TSMC’s MoM Revenue
TSMC's revenue in July soared by 44.7% year-over-year, reaching approximately NT$256.95 billion, driven by increasing demand for AI chips used in artificial intelligence products.
As a key supplier to major tech giants like Apple, Nvidia, and AMD, TSMC also experienced a 23.6% rise in revenue compared to the previous month, with June's revenue totaling NT$207.87 billion.
For the first seven months of 2024, TSMC's revenue reached NT$1.523 trillion, marking a significant 30.5% increase compared to the same period in 2023.
Taiwan’s TSMC is further solidifying its dominance in the semiconductor foundry sector as demand for AI chips continues to surge. Renowned for its high yields and advanced packaging capabilities, TSMC is capturing an increasing share of orders.
Tailwinds from TSMC at 2nm Node
But the sweet spot for ASML is the 2nm node, since ASML’s lithography systems are just being delivered and will represent a large percentage of revenues in 2025 and 2026. Shown in Chart 2 is pricing for each node by year, illustrating the ASPs (average selling price) of the 2nm node, which will be introduced in 2025.
I discussed this pricing in a March 5, 2024 Seeking Alpha article entitled "Taiwan Semiconductor Raising Prices 8.7% In 2024 As Revenue Growth Underperforms Customers."
Chart 2
According to C. C. Wei, Vice Chairman & CEO of TSMC during the Q1 2024 earnings call:
“N2 technology development is progressing well with device performance and yield on track or ahead of plan. N2 is on track for volume production in 2025.
We start the N2 production in the second half of 2025, actually in the last quarter of 2025. And because of the cycle time and all the kind of back-end process, and so we expect the meaningful revenue will start from the end of the first quarter or beginning of the second quarter of 2026.”
According to AnandTech, TSMC is gearing up to construct two fabrication plants capable of producing N2 chips in Taiwan. The first fab is planned to be located near Baoshan in Hsinchu County, neighboring its R1 research and development center, which was specifically built to develop N2 technology and its successor. This facility is expected to commence high-volume manufacturing (HVM) of 2nm chips in the latter half of 2025. The second N2-capable fabrication plant by is to be located in the Kaohsiung Science Park, part of the Southern Taiwan Science Park near Kaohsiung. The initiation of HVM at this plant is projected to be slightly later, likely around 2026.
TSMC’s 2nm fabs are located in Hsinchu and Kaohsiung, Taiwan.
Located in the Hsinchu Science Park, TSMC’s Baoshan site construction began in early 2022. The equipment installation phase began in April 2024, including ASML’s multiple Twinscan NXE EUV systems. High-volume manufacturing is expected to start in 2H 2025, with an initial production capacity of 30,000 wafer starts per month (wspm).
The second 2nm fab is in the Kaohsiung Science Park. Lithography equipment installation is planned for 3Q 2025, with pilot runs planned in 4Q 2025. Followed by full-scale production in 2026. Initial capacity is also 30,000 wspm using TSMC’s enhanced N2P process that features backside power rail technology to enhance power efficiency and performance.
Table 2 presents my analysis of ASML sales of DUV and EUV equipment to TSMC for its 2nm production in its two fabs in Taiwan.
Strong Sales to China Despite Sanctions
Table 3 shows revenues from sales of semiconductor equipment to China by company, between 2022 and 2024. In Q1 2024 ASML generated 49% of revenues from China. Significantly larger than the 17% in 2022, it peaked at 46% in Q3 2023, slowed in Q4 2023, before increasing again in Q1 2024, according to my report entitled Mainland China’s Semiconductor and Equipment Markets: Analysis and Manufacturing Trends.
This high percentage of revenues is not only benefiting ASML but all the top companies shown in Table 1, despite U.S. Government sanctions on sales of equipment to capable of making sub 12nm node chips. As the U.S. Government continues to tighten sanctions, Chinese semiconductor companies have gone full board in purchasing as much non-Chinese-made equipment as they could, to the point of hoarding anticipating deeper and broader sanctions.
This equipment is allowed to be shipped under U.S. sanctions, for the processing of mature and mid-critical nodes, i.e., >12nm, to China, as most vendors except for possibly Applied Materials complied with export control regulations.
It must be remembered that ASML’s flagship EUV (extreme ultraviolet) lithography system, priced exceeding $250 million, has been sanctioned for sales to China since the Trump administration. I will discuss EUV later in this article in an analysis of sub-5nm chip tailwinds for ASML.
But immersion DUV systems have been largely exempt from U.S. Sanctions, except for a few of ASML’s high-end systems. And the growth of DUV sales results in growth of other processing types of equipment.
KLA Corporation (KLAC) is the biggest beneficiary of DUV systems in China (and, of course, other regions) because the smaller the technology node, the greater the need for KLAC’s inspection/metrology equipment demanded to maintain high manufacturing yields. I discussed this issue in detail in my May 15, 2024, Seeking Alpha article entitled KLA: Benefiting From The Need For High Yields In Sub-5nm Chip Production.
Equally important, DUV has been able to pattern 7nm and below chips in China, which I first brought to investors’ attention in my May 18, 2022, Seeking Alpha article entitled “Applied Materials: SMIC Move To 7nm Node Capability Another Headwind.”
But to get there, semiconductor manufacturers must employ multi-patterning processes with DUV lithography. Why? Because DUV lithography on its own only works up to the 39nm technology node. Lower than that, multi-patterning processes need to be used, and these processes use deposition and etch equipment from companies like Lam Research (LRCX) or Tokyo Electron (OTCPK:TOELY).
As an example of the synergy between lithography and multi-patterning equipment, even when hamstrung by U.S. Sanctions to limit production of chips in China to mature and mid-critical nodes:
At the 28nm node, no EUV systems are required anyway, and 10 DUV immersion systems are required for the 50,000 wafers per month (wpm). At 7nm, normally 15 DUV systems and 5 EUV systems are demanded, depending on chip type and company. However, since Chinese fabs such as SMIC are not permitted to use EUV by U.S. sanctions, then they will be substituted by DUV, and 20 DUV systems will be used.
In both cases, multiple patterning is done to delineate that pattern, whether it is 28nm or 7nm. This multiple patterning process is more or less a trick to reach even the 28nm dimensions. The multiple patterning is typically a combination of deposition, etch, and lithography steps.
For a fab making 50,000 wpm at 28nm, in addition to the 10 DUV immersion systems, multiple patterning will demand 125 etchers and 200 CVD systems. At 7nm, in addition to the 20 DUV immersion systems, multiple patterning will demand 350 etchers and 175 CVD systems. Clearly, non-lithography equipment suppliers benefit from the sale of DUV systems.
Backlog of EUV Systems
At the end of Q2 2024, ASML had a backlog of 75 EUV systems with an ASP of €180 million, as show in Chart 3. I also estimate 160 DUV systems in backlog with an ASP of €77 million. Unlike memory IC companies, logic/foundry semiconductor companies are not likely to cancel orders despite the downturn and oversupply of chips as leading foundry companies migrate to smaller technology nodes.
In addition, ASML received acceptance from its customers on DUV tools to recognize revenue upon shipment. This resulted in €700M of revenue recognized in 2023 and no longer deferred into 2024, as a result of screaming demand for DUV systems coming from China.
Chart 3
Investor Takeaway
In the near- and midterm, ASML's strategic focus will be on high-volume manufacturing for TSMC's 2nm nodes – one of the three biggest opportunities I detail in this article. I estimate WFE spend for 2nm manufacturing will entail the purchasing of 16 EUV and 10 DUV systems in 2024, followed by 38 EUV and 22 DUV systems in 2025, highlighting the critical role of ASML's lithography equipment in advancing semiconductor manufacturing. These purchases are expected to generate €3.5 billion in revenue in 2024 and €8.19 billion in 2025. Additionally, ASML's extensive order backlog of 75 EUV systems and 160 DUV systems highlights continued robust demand.
ASML's significant revenue from China, where it generated 49% of its Q1 2024 revenues, should continue through 2024 as its DUV technology is recognized by Chinese semiconductor manufacturers as the leading lithography product.
U.S. Sanctions have had minimal negative effect on the company as it is production limited on EUV systems and can sell as many as they can make to TSMC, Samsung (OTCPK:SSNLF), Intel (INTC), SK Hynix, and Micron (MU). Until China’s SMEE can produce a production-worthy DUV system, ASML has minimal competition from Canon (CAJ) and Nikon (OTCPK:NINOY).
I rate ASML a Buy, despite historic issues with supply chain and inability to ship completed EUV systems to customers
Great value here Robert. I see a difference in TSMC's monthly revenue compared to the data I can find. Is it correct that your table shows less revenue for the '24 months compared to the '23 months?