In the rapidly evolving landscape of artificial intelligence (AI), where companies like Nvidia (NVDA) and OpenAI dominate headlines, one Dutch firm stands as the unsung hero powering the industry’s backbone: ASML (ASML)

With a market capitalization of approximately $300 billion and a monopoly on extreme ultraviolet (EUV) lithography machines, ASML holds the key to manufacturing the advanced chips that drive AI innovation.

Unlike traditional AI stocks that focus on software or chip design, ASML’s unique position as the sole provider of this critical equipment makes it indispensable. It makes ASML arguably the only AI stock investors need to own.

One Technology To Rule Them All
ASML’s dominance stems from its EUV lithography technology, a groundbreaking process that enables the production of cutting-edge AI chips. EUV uses 13.5 nanometer (nm) light to etch intricate patterns onto silicon wafers with precision surpassing the size of a virus and allowing for sub-2 nm chip nodes.

This involves a complex system of mirrors and lasers, assembled from over 100,000 components sourced globally, with each machine costing upwards of $200 million. Companies like Taiwan Semiconductor Manufacturing (TSM), Intel (INTC), and Nvidia rely entirely on ASML’s machines to fabricate their chips, creating a bottleneck that no competitor can breach.

The technology’s difficulty – highlighted by China’s failed attempts to replicate it – cements ASML’s monopoly, making it the linchpin of the semiconductor industry.

This monopoly positions ASML to capture the robust tailwinds of the AI boom. As demand for AI infrastructure surges – driven by cloud providers, data centers, and tech giants – chipmakers require more advanced, efficient chips, which only ASML can produce. The company’s High-NA EUV systems, set for high-volume manufacturing later this year or next, promise to support geometric chip scaling, ensuring long-term relevance.

With limited production (only around 50 machines annually) and no need for aggressive marketing, ASML’s revenue grows organically, fueled by the insatiable appetite for AI technologies. This positions it to benefit from every advancement in the AI race, from autonomous vehicles to generative AI.

No Stock is Risk-Free
However, ASML faces notable risks. Geopolitical tensions, particularly U.S.-China trade restrictions, have already impacted its sales, with China accounting for 41% of shipments in 2024. Further export bans could shrink its market, while retaliatory tariffs threaten profitability. But beyond geopolitical tensions and export restrictions, ASML there are other risks that warrant scrutiny.

The company’s reliance on a complex global supply chain, with over 5,000 suppliers, exposes it to disruptions from pandemics, trade disputes, or raw material shortages – issues that could delay production and inflate costs. Moreover, the high R&D expenditure (approximately 3.6 billion euros in 2024) to maintain its technological edge strains margins if innovation falters. Competition from emerging lithography alternatives, though distant, could also erode its monopoly over time.

Additionally, its valuation, with a forward P/E of 25 – just above the sector average of 24 – suggests it trades at a slight premium to its market, raising concerns amid growth uncertainties. Slow adoption of High-NA technology could also pose a near-term challenge.

Its price-to-sales (P/S) ratio of 9, compared to the sector’s under 7, further suggests a premium. With a debt-to-equity ratio of 0.21 – low but rising – ASML maintains financial flexibility, yet investors should monitor this amid capital-intensive growth. These metrics underscore the need for cautious optimism amid its AI-driven ascent.

Conclusion: You Can Stop Looking Here
ASML’s unrivaled control over EUV lithography makes it the only AI stock investors need. Its technology underpins every major chipmaker, ensuring it rides the AI wave with unmatched stability. While risks like geopolitics and valuation persist, ASML’s indispensable role and long-term growth potential outweigh these concerns, making it a must-own asset in the AI-driven future.

— Rich Duprey

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Source: Money Morning