INTRO: Do you know who’s the third-largest semiconductor company in the world? The first two are relatively easy to guess, they’re Nvidia and TSMC. But what about the third one? Some good guesses would be Intel, Qualcomm, and TI, but the answer is actually a company called ASML. Currently, ASML boasts a market cap of just under $300 billion coming in at the 29th largest publicly traded company in the world.
To put that in perspective, their market cap is currently over twice that of AMD. Aside from a behemoth market cap, in terms of semiconductor wafer front-end equipment market share, ASML was the second largest single market share holder coming in at 15.4%, only beaten out by Applied Materials. Yet most people have never even heard about ASML. So, here’s the story of ASML and how they became the $300 billion shadow chip company.
SHED OPERATION: Taking a look back, the story of ASML dates back to the Netherlands to the year 1984. At the time, many chip companies were trying to commercialize a manufacturing technique called photolithography. Photolithography is the process of using light in order to produce a thin protective film. In terms of semiconductors, the thin film is generally used to protect select portions of silicon wafers. This technique actually has roots that date back as far as 1820 to a french inventor named Nicephore Niepce, but it wasn’t till the 1970s that semiconductor companies really started to leverage this process.
In the meantime, two relatively small companies named Royal Philips Electronics and Advanced Semiconductor Materials International, or ASMI, felt that they were being left behind with this process. So, they decided to make a joint venture called Advanced Semiconductor Materials Lithography or ASML. Despite being founded by two existing companies, the early days of ASML weren’t glamorous by any means.
Philips cleaned out a shed behind one of their offices and that became the new headquarters of ASML. Over the next several months, ASML focused on developing and integrating photolithography. And given that they weren’t inventing a new process from scratch, it didn’t take them too long to come out with their first system called the PAS 2000 stepper. If you’ve ever wondered what the big machines in chip factories are, well, this is one of them.
Anyway, with their first product up and running, the parent companies decided to up their investments into ASML. By 1985, ASML upgraded to a newly built office and factory located in Veldhoven. Their employee count also grew to a solid 100 employees. Soon after, ASML came out with their second product in 1986 which was the PAS 2500 stepper. As ASML’s product lineup grew, they started to form partnerships with established companies such as the lens manufacturer Carl Zeiss.
Philips also helped ASML open locations in Taiwan and the United States, but all was not good. Here’s the thing, while ASML was churning out great products, it was nothing particularly new or innovative. There was already plenty of comparable solutions from established semiconductor companies, and customers saw no reason to take a gamble with a startup. So, ASML had high expenses and little revenue. To make things worse, one of the parent companies, ASMI, would call it quits in the mid-1980s.
They sold their 50% stake in ASML to Philips and left the startup. While Philips purchased the stake from ASMI, they weren’t that optimistic about ASML either. Philips’ investors were starting to suggest that ASML was a lost cause and that Philips should cut losses as soon as possible. Considering the dire situation, ASML’s executives reached out to Philips’ board member Henk Bodt, and they were able to come to one final deal. Philips would back one more round of funding, but if that didn’t work or wasn’t enough, they were going to shut down ASML. Oftentimes, it’s when the stakes are the highest that we produce the best results, and this couldn’t be truer for ASML as they came out with a breakthrough platform called the PAS 5500.
BREAKTHROUGH: The PAS 5500 boasted industry-leading productivity and resolution which motivated many customers to give the startup a shot, and this is exactly what ASML needed to finally turn a profit. Despite the positive progress though, Philips was still looking to get out of ASML. So, in 1995, they took ASML public on the Amsterdam and New York Stock exchanges at roughly a billion-dollar valuation. Philips sold half of their stake at IPO, and they slowly sold off the rest of their stock over the next couple of years.
And with that, Philips was completely out of the business, but that was ok as they had already done their part in keeping ASML alive. Ever since then, ASML has expanded into 3 other categories aside from lithography which include the track division, the thermal division, and the special applications division. Starting with the track division, this part of the company focuses on producing equipment that can coat, develop, and bake light-sensitive materials onto a wafer’s surface.
Moving onto the thermal division, this sector produces furnaces and deposition systems. The furnaces are used to heat up wafers during the manufacturing process, and the deposition systems are used to remove chemical vapors. And finally, the special applications division is basically just a customization department. This sector customizes products produced by the other departments to meet customer needs. For example, one customer might need larger furnaces in order to manufacture larger batches of wafers.
Similarly, another customer might need smaller furnaces and so on and so forth. Looking at these divisions, you probably realized that ASML isn’t actually a chip manufacturer themselves. Instead, they primarily deal with manufacturing chip-producing equipment. So, they’re basically the top of the semiconductor food chain. When you buy an iPhone, Apple turns around and gets Foxconn to manufacture the smartphone.
Foxconn then turns around and calls up TSMC to source the chips. And then TSMC turns around and calls up ASML to get their equipment. So, though ASML is mostly invisible to the public, without them, basically nothing would take place. Anyway, going back to the late 1990s, the dot-com bubble was in full force, and ASML leveraged the bubble to raise money and continue innovation. They were no longer innovating to catch up though, now, they were innovating to lead the market. In 1996, ASML introduced their step and scan system which blew away the competition.
This system was capable of producing 100 wafers per hour which was nearly double the standard 60 wafers per hour. Seeing this, the US Department of Energy invited ASML to expand its presence in the US through the Extreme Ultraviolet LLC program. As the name suggests, the program aimed to upgrade traditional photolithography to use extreme ultraviolet light. ASML did end up figuring out this technology and customers far preferred it. And by the end of the century, ASML grew to be the 2nd largest semiconductor supplier in the world. Unfortunately though, this was the highest point they would see for a decade.
CLIFF DIVE: By now, we’ve discussed the dot-com crash so many times on this channel that I’m sure you guys know what went down. Years of exuberant speculation and hopium finally came crashing down in the early 2000s which crushed the entire stock market and especially tech companies, and ASML was by no means immune to this. ASML was expecting a slowdown as the chip industry often operates in boom and bust cycles, but the bust was far worse than they anticipated. ASML had told their investors that 2001 sales should be roughly the same as 2000, so they were tempering expectations.
But, by March of 2001, it became clear that even matching sales was going to be impossible. ASML froze hiring and focused on just completing existing contracts, but companies were pulling out of contracts left and right. For example, Intel canceled a $100 million order. By the end of 2001, net sales had nearly halved in comparison to 2000 from 3.1 billion euros to 1.84 billion euros. ASML also put in a painful $422.4 million loss. And as you would guess, the stock graph didn’t look much better.
By October of 2002, ASML stock was down a full 90% from their peak in 2000. Despite the harsh decline, ASML actually faired a lot better than the rest of the industry given that ASML did eventually recover and put in new all-time highs. But, back in the early 2000s, things were only getting worse for ASML. At the end of 2001, Nikon filed a patent infringement lawsuit against ASML. Nikon claimed that ASML had infringed upon 7 of their patents relating to microlithography equipment.
A couple of months later in April of 2002, ASML countersued Nikon suggesting that it was Nikon that infringed upon ASML’s patents. This didn’t work out too well for ASML though as the two eventually came to a settlement where ASML paid Nikon $87 million. Fortunately though, things finally started to turn around for ASML after this lawsuit. ASML had started shipping out their TWINSCAN systems which offered a revolutionary dual-stage technology.
Instead of measuring and aligning a wafer and then exposing it, Twinscan systems could do both tasks simultaneously. This technology allowed customers to produce smaller chips faster and more efficiently than ever before. Also, do you remember the EUV technology that ASML started working on in the late 1990s? Well, they shipped their first EUV lithography machine called the NXE 3100 in 2010, and they’ve been a leader in EUV lithography ever since. Aside from rolling out new technologies, ASML was slowly acquiring companies in the background.
For example, in 2001, they acquired the Silicon Valley Group for $1.6 billion. Similarly, in 2007, they acquired Brion technologies for $270 million. And in 2013, they acquired Cymer for $2.5 billion. All these acquisitions allowed ASML to return to their dot-com peak by mid-2013, but ASML was just getting started.
ASML TODAY: Over the past 5 to 7 years, ASML has been doing better than ever before because the semiconductor industry has been doing than ever before due to three main reasons starting with AMD. In 2017, AMD introduced their Ryzen line of processors which made gaming computers more affordable and powerful than ever before.
This led to more casual gamers entering the PC master race which substantially increased demand for CPUs and GPUs. Around the same time, Bitcoin was making its first move towards to moon rising to $20,000. By this point, it already didn’t make sense to use GPUs to mine bitcoin. But, it did make sense to use GPUs to mine ethereum. And given how profitable ethereum mining was, miners basically bought up the entire GPU market. Seeing how much demand there was for GPUs, Nvidia decided to significantly hike prices with the launch of the 2000 series, and these prices have never gone down.
And finally, to make things even worse, the pandemic brought with it the supply shortage which has just made it even easier for suppliers to hike prices and increase profit margins. Considering this semiconductor boom, I don’t think you’d be too surprised to hear that ASML’s revenues and profits have grown severalfold. In the mid-2010s, ASML was pulling in $6 to $7 billion in revenue every year. In the most recent 12 month period, they pulled in over $20 billion. Similarly, in the mid-2010s, ASML was pulling in about $1.5 billion in net profit every year.
In the most recent 12 months period, ASML pulled in $6.4 billion in net profit. So, things are going quite well for ASML right now, but as we saw in 2000, it doesn’t take that long for things to turn around. The supply shortage is not going to last forever, cryptocurrencies are moving towards proof of stake which eliminates the need for GPUs and ASICs, and it’s just a matter of time until the new influx of gamers due to Ryzen starts to stagnate.
So, the next decline is just a matter of when not if. But, regardless of what decline comes around, it’s clear that ASML isn’t going anywhere anytime soon. And for all of our sakes, that’s probably a good thing. Where you guys familiar with ASML? Comment that down below. Also, drop a like if you’re thankful for ASML. And of course, consider checking out our international channels to watch our videos in other languages and consider subscribing to see more questions logically answered.