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ASML's 2025 Outlook and Fair Value Cut

ASML Holding NV's shares have declined due to weak 2025 revenue guidance, now estimated between EUR 30 billion to EUR 35 billion, and a reduction in fair value estimate from EUR 900 to EUR 850 per share. The company's third-quarter orders were significantly below expectations, leading to concerns about future growth, particularly with major clients like Intel and Samsung facing challenges. Despite these issues, ASML remains a leader in photolithography systems with a strong competitive position and potential for long-term growth.

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ASML's 2025 Outlook and Fair Value Cut

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Morningstar Equity Analyst Report | Report as of 16 Oct 2024 01:05, UTC | Reporting Currency: EUR | Trading Currency: USD

| Exchange: NASDAQ - ALL MARKETS Page 1 of 23

ASML Holding NV ADR ASML QQQQ 15 Oct 2024 21:25, UTC

Last Price Fair Value Estimate Price/FVE Market Cap Economic MoatTM Equity Style Box Uncertainty Capital Allocation ESG Risk Rating Assessment1
730.39 USD 935.00 USD 0.78 287.21 USD Bil Wide 3 Large Growth High Exemplary ;;;;;
15 Oct 2024 15 Oct 2024 20:05, UTC 15 Oct 2024 2 Oct 2024 05:00, UTC

Price vs. Fair Value

Fair Value: 935.00

15 Oct 2024 20:05, UTC
959
Last Close: 730.39
759 Overvalued
Undervalued
559

359

159
2019 2020 2021 2022 2023 YTD
Analysis
1.74 1.34 1.11 0.78 1.01 0.78 Price/Fair Value
92.43 65.77 64.05 -30.54 39.72 -2.83 Total Return %
Morningstar Rating

Total Return % as of 15 Oct 2024. Last Close as of 15 Oct 2024. Fair Value as of 15 Oct 2024 20:05, UTC.
Contents
Analyst Note (15 Oct 2024) ASML: Weak 2025 Guidance Weighs on Shares, We Cut Fair
Business Description
Business Strategy & Outlook (17 Apr 2024) Value Estimate; Shares Undervalued
Bulls Say / Bears Say (15 Oct 2024)
Analyst Note Javier Correonero, Equity Analyst, 15 Oct 2024
Economic Moat (17 Apr 2024)
Fair Value and Profit Drivers (15 Oct 2024)
ASML’s shares declined 14% as the firm accidentally published its third-quarter results one day ahead
Risk and Uncertainty (17 Apr 2024) of schedule. ASML lowered its 2025 revenue guidance and now expects revenue to be in the EUR 30
Capital Allocation (17 Apr 2024) billion to EUR 35 billion range. Although this falls inside management’s EUR 30 billion to EUR 40 billion
Analyst Notes Archive target set at the 2022 investor day, we expected 2025 revenue to be in the midpoint of the guided
Financials
range, as management commentary in the past two quarters pointed toward reaching that goal. 2025
ESG Risk
gross margins will also be weaker, in the 51% to 53% range, compared with management’s previous
Appendix
Research Methodology for Valuing Companies target of 54% to 56%, due to lower sales and postponement of some EUV orders. China should
moderate to around 20% of group revenue in 2025, which we expected.
Important Disclosure
The conduct of Morningstar’s analysts is governed by Code of Ethics/Code of
Conduct Policy, Personal Security Trading Policy (or an equivalent of), and Third-quarter orders were weak, which mostly explains the weak 2025 guide, and came in at EUR 2.6
Investment Research Policy. For information regarding conflicts of interest, please
visit: [Link] billion versus expectations of EUR 5 billion. Logic foundries are ramping up new nodes at a slower pace
The primary analyst covering this company does not own its stock. than expected, and ASML is seeing little capacity additions in memory so far. We believe Intel is at the
The ESG Risk Rating Assessment is a representation of Sustainalytics’ ESG Risk
1 heart of ASML’s weaker outlook, as it recently postponed the opening of its Magdeburg fab, and more
Rating.
delays and issues could keep coming. In September, Samsung issued an apology letter to investors for
its recent technological underperformance, so we believe both firms might have a more cautious 2025
perspective. In the memory market, capacity additions—aside from high-bandwidth memory needed for
AI buildout—remain weak.

© Morningstar 2024. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions ®
presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The
opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting
ß
from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner,
without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and
governed by the U.S. Securities and Exchange Commission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report.
Morningstar Equity Analyst Report | Report as of 16 Oct 2024 01:05, UTC | Reporting Currency: EUR | Trading Currency: USD | Exchange: NASDAQ - ALL MARKETS Page 2 of 23

ASML Holding NV ADR ASML QQQQ 15 Oct 2024 21:25, UTC

Sector Industry
Semiconductor Equipment & We cut our fair value estimate to EUR 850 from EUR 900 per share, as we reduce our 2025 and 2030
a Technology
Materials
forecasts. We now assume EUR 32.1 billion in revenue in 2025, versus EUR 36 billion previously, and
Business Description
EUR 54.1 billion in 2030, compared with EUR 58.4 previously. In our view, ASML is a good buying
ASML is the leader in photolithography systems used in
opportunity after this pullback, and the current share price is discounting a too pessimistic long-term
the manufacturing of semiconductors. Photolithography
is the process in which a light source is used to expose scenario. At the EUR 668 closing price, ASML is trading at a 28.5 times forward 2025 PE ratio based on
circuit patterns from a photo mask onto a semiconductor our estimates.
wafer. The latest technological advances in this segment
allow chipmakers to continually increase the number of Business Strategy & Outlook Javier Correonero, Equity Analyst, 17 Apr 2024
transistors on the same area of silicon, with lithography We believe ASML will remain the top lithography equipment provider in semiconductor foundries for at
historically representing a high portion of the cost of
least the next two decades. Taiwan Semiconductor Manufacturing, Intel, and Samsung’s fabs were
making cutting-edge chips. ASML outsources the
redesigned one decade ago to make them suitable for extreme ultraviolet lithography, or EUV, a costly
manufacturing of most of its parts, acting like an
assembler. ASML’s main clients are TSMC, Samsung, and long endeavor, so it is quite unlikely ASML will be displaced from its place in the foundry. In
and Intel. addition, no competitor has yet matched ASML’s technological leadership and the company’s
competitive advantage will likely keep expanding as it grows its already-high EUR 4 billion research and
development budget.

ASML is an assembler, sourcing the highest-quality parts from suppliers to build its lithography
machines. This allows the firm to maintain cost flexibility in the cyclical semiconductor industry, a
positive for gross margins. ASML has a solid supply chain management strategy as some of its parts are
single-sourced and the firm has never had any major disruptions.

Despite the high price of ASML’s machines, the company provides value to customers by bringing down
the cost per wafer through increased productivity. This focus is crucial, as customers need to see a
return on investment when they spend EUR 200 million to EUR 300 million on a single lithography
machine. ASML’s machines are the bottleneck of the fab, so if productivity stagnates customers could
look for workarounds to reduce their dependency on lithography.

ASML’s machines can last more than 30 years. The firm sells the machines at an attractive gross
margin, but then keeps generating recurring service revenue for many decades. ASML EUV machines
are more complex than previous deep ultraviolet, or DUV, ones, which means a higher potential for
service revenue during its lifetime. Ninety percent of ASML’s lithography equipment that has been sold
is still functioning and generating service revenue. Management expects to increase service margins in
the next decade as it focuses more on this segment and launches more complex machines. Software
and hardware upgrades are also a high margin business, although these can be more cyclical given the
foundry needs to stop production to implement them.

Bulls Say Javier Correonero, Equity Analyst, 15 Oct 2024

u ASML’s machines last more than 30 years, providing recurring service revenue. The switching costs and

ASML Holding NV ADR ASML QQQQ 15 Oct 2024 21:25, UTC

Competitors
ASML Holding NV ADR ASML Applied Materials Inc AMAT KLA Corp KLAC Lam Research Corp LRCX

Fair Value Fair Value Fair Value

Last Close
935.00 193.00 83.00
Uncertainty : High Uncertainty : High 707.89 Uncertainty : High
Last Close Fair Value Last Close
Last Close 191.08 670.00 76.40
730.39 Uncertainty : High

Analysis
Economic Moat Security
Wide 1 Security
Wide 2 Security
Wide 3 Security
Wide 4
Currency USD USD USD USD
Fair Value 935.00 15 Oct 2024 20:05, UTC 193.00 16 Aug 2024 01:29, UTC 670.00 25 Jul 2024 02:11, UTC 83.00 1 Aug 2024 00:36, UTC
1-Star Price 561.00 299.15 1,038.50 128.65
5-Star Price 1,449.25 115.80 402.00 49.80
Assessment Undervalued 15 Oct 2024 Fairly Valued 15 Oct 2024 Fairly Valued 15 Oct 2024 Fairly Valued 15 Oct 2024
Morningstar Rating QQQQ15 Oct 2024 21:25, UTC QQQ15 Oct 2024 21:28, UTC QQQ15 Oct 2024 21:26, UTC QQQ15 Oct 2024 21:26, UTC
Analyst Javier Correonero, Equity Analyst William Kerwin, Equity Analyst William Kerwin, Equity Analyst William Kerwin, Equity Analyst
Capital Allocation Exemplary Exemplary Exemplary Exemplary
Price/Fair Value 0.78 0.99 1.06 0.92
Price/Sales 12.48 6.66 11.51 7.59
Price/Book 21.75 9.36 33.11 13.08
Price/Earning 37.99 21.47 32.07 26.56
Dividend Yield 0.76% 0.67% 0.70% 0.97%
Market Cap 287.19 Bil 157.53 Bil 94.84 Bil 9.90 Bil
52-Week Range 573.86—1,110.09 129.21—255.89 452.01—896.32 57.44—113.00
Investment Style Large Growth Large Blend Large Blend Large Blend

intangible assets required to displace these machines are enormous, with no competitor coming even
close to ASML’s technological leadership
u As lithography machines get more complex, switching costs and service revenue potential strengthen.
ASML has potential to improve gross margins in the next decade.
u We expect ASML to outpace the growth of the overall semiconductor market, thanks to its strong
competitive position. We expect low-double-digit annual revenue growth in the next decade.

Bears Say Javier Correonero, Equity Analyst, 15 Oct 2024

u ASML sells a low-volume, high-price product. Lithography machines represent a high proportion of
customer costs, so if the company fails to innovate customers will look for alternatives.
u If controls on exports to China keep worsening, ASML’s growth trajectory will suffer. The firm has no
effective control over this risk as it largely depends on US government decisions.
u The cyclical nature of the semiconductor industry adds to ASML’s risk profile. Also, ASML depends on a
© Morningstar 2024. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions ®
presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The
opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting
ß
from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner,
without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and
governed by the U.S. Securities and Exchange Commission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report.
Morningstar Equity Analyst Report | Report as of 16 Oct 2024 01:05, UTC | Reporting Currency: EUR | Trading Currency: USD | Exchange: NASDAQ - ALL MARKETS Page 4 of 23

ASML Holding NV ADR ASML QQQQ 15 Oct 2024 21:25, UTC

limited number of suppliers for certain components, so any disruption will create bottlenecks and
delays.

Economic Moat Javier Correonero, Equity Analyst, 17 Apr 2024

We assign ASML a wide economic moat rating supported by intangible assets, cost advantages, and
switching costs. ASML is the world's largest supplier of photolithography machines for semiconductors
with around 90% market share. It enjoys a wide technology gap with its competitors Nikon and Canon,
with large investments in research and development that should continue widening ASML's moat and
act as a barrier to entry. Intangibles come from decades of internal know-how and long-term
collaboration with firms like Carl Zeiss and scientific research institutes. Switching costs come from
software and servicing of the machines, as fabrication plants cannot afford unplanned downtime since
this can cost millions of dollars.

ASML sells semiconductor lithography machines, which are used to print nanometer patterns in chips.
Its two main product lines are DUV and EUV lithography machines. DUV has been ASML's profit engine
for more than a decade now. It has been used since the early 2000s and is still widely used to
manufacture chips today. ASML is the only company capable of producing EUV lithography machines,
which use a light source to print chip patterns and are required to manufacture the most advanced
chips used in smartphones, computers, and artificial intelligence training. ASML's lithography machines
can print patterns that are up to 30,000 times thinner than a human hair. These patterns form a highly
intricate 3D puzzle, with dozens of interconnected layers that optimize computational performance,
energy consumption, and heat dissipation in a chip. Moore's Law, which states the number of
transistors in a chip will double every two years, is becoming more challenging to achieve. However,
ASML machines keep providing new workarounds to shrink chip patterns and improve energy
efficiency.

ASML machines are a very complex combination of physics, electrical, and mechanical systems. An EUV
machine takes 12-18 months to be assembled, weeks to get installed and it can occupy dozens of
square meters and weigh up to 200 metric tons. These machines have so many subsystems that,
according to ASML, a single engineer would not be able to understand the entire machine, but only his/
her area of expertise. ASML's lithography machines are the result of the assembly and integration of
thousands of high-quality supply parts, with ASML acting as the coordinator and assembler. Machines
are also the result of decades of internal know-how, research and development and partnerships with
firms like Carl Zeiss, Philips, or research centers like IMEC. ASML's Senior Vice President of Technology
Jos Benschop said in an interview on Dutch television station VPRO in 2022: “You could put 10,000
intelligent people in the same room, give them all the drawings of our machine, and the machine
wouldn't work. Some things are simply not in the drawings.”

In our view, Nikon and Canon (Japan) are not competitors for ASML, as their lithography technology is
© Morningstar 2024. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions ®
presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The
opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting
ß
from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner,
without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and
governed by the U.S. Securities and Exchange Commission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report.
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ASML Holding NV ADR ASML QQQQ 15 Oct 2024 21:25, UTC

well behind. The most advanced machines Nikon and Canon can manufacture are immersion
lithography machines, which are workhorse machines that are still widely used today (also by ASML,
called DUV). Even if Nikon or Canon did decide to replicate ASML's EUV machines, this would require an
immense amount of time and money. They would need to make the technology viable on their own,
develop similar industry relationships, and would need decades to improve their internal processes.
Aside from its technology, ASML has very long-term relationships with its customers, which gives them
first-hand knowledge over fabs' pain points and an advantage when deciding where to innovate.

One decade ago TSMC, Samsung, and Intel invested EUR 4 billion to fund the development of EUV and
redesigned their fabs to make them ready for this technology. Even if a new and viable lithography
technology that could compete with ASML's EUV was developed, fabs would have to be entirely
redesigned again for this purpose, something we consider very unlikely. Fabrication plants are also
highly standardized to facilitate knowledge sharing and reduce manufacturing defects, so fabs would
need to change their entire fleet of lithography machines if they would change suppliers, an endeavor
that would cost billions. From an R&D perspective, Canon invests EUR 2.2 billion (JPY 300 billion) per
year across four divisions, with lithography representing less than 10% of group revenue, compared
with ASML's R&D budget of more than EUR 4 billion, but purely focused on lithography. Nikon invests
around EUR 450 million per year (JPY 70 billion) in R&D across five divisions. This huge gap provides
ASML with a cost advantage that generates high barriers to entry and seems virtually impossible to
close at this point.

It is not only important that machines are extremely precise, but that they are able to function at high-
uptime and high-manufacturing yield. Fabs have enormous fixed costs, so they need to function 24/7 to
generate the necessary economies of scale. In addition to this, lithography machines are the bottleneck
of the plant; this means any downtime can cost millions of dollars to a foundry. Even if a competitor
does manage to create machines as precise as those of ASML, it would still need to deliver the same
uptime and manufacturing yields. ASML's DUV machines have 97% uptime and EUV ones are getting
closer to 95%. For example, Chinese lithography company Shanghai Micro Electronics Equipment claims
to have reached the 5-nanometer process node. Even if this is true, it is highly debatable these
machines can function at an acceptable manufacturing yield. The semiconductor value chain is highly
globalized and we believe China lacks the connections, engineering talent, and know-how to replicate
ASML's lithography machines.

ASML is a recurring revenue business model, with machines that were shipped in the 1980s and 1990s
still generating service revenue today. The installed base management business focuses on the
servicing, upgrading, and software of machines. Once a lithography machine is sold, the customer is
locked in for 20-30 years and we estimate customer retention rates are very high. As lithography
machines get more complex, they become more crucial in the manufacturing process, and ASML's
© Morningstar 2024. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions ®
presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The
opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting
ß
from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner,
without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and
governed by the U.S. Securities and Exchange Commission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report.
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ASML Holding NV ADR ASML QQQQ 15 Oct 2024 21:25, UTC

switching costs strengthen. A modern fab costs around $20 billion to $24 billion to build, of which $4
billion to $6 billion goes to lithography (20%-25%). Third-party service providers not only lack the
technical skills to service these machines, but even if they could we doubt customers like TSMC or
Samsung would risk getting an unverified service provider. During its life span, an ASML DUV
machine—the previous generation to EUV—generates 130% in service revenue compared with
equipment revenue. Management estimates EUV machines, used for cutting-edge chips, will generate
around 150% given their higher complexity and we estimate this could be above 150% for future
generations of machines (High-NA EUV). ASML's offering also extends beyond traditional servicing as it
offers software and hardware upgrades for its customers. A customer who owns a machine that is 15
years old can significantly step up productivity with some investment and a few weeks of downtime.
Although upgrades are still expensive it is still cheaper than purchasing a new machine, so we believe
customers find value in this proposition.

Fair Value and Profit Drivers Javier Correonero, Equity Analyst, 15 Oct 2024
Our fair value estimate for ASML ADR shares is $935. We have reduced our short-term and midterm
outlooks, as we incorporate management's new 2025 guidance into our model. While we previously
expected 2025 sales of EUR 36 billion, in the midpoint of ASML's EUR 30 billion to EUR 40 billion
guidance, we now forecast EUR 32 billion in 2025 sales, with some sales being pushed into 2026, where
we also expect low-double-digit growth. Logic foundries are ramping up new nodes at a slower pace
than expected in 2025, and ASML is seeing little capacity additions in memory so far. We have also
reduced our 2030 sales forecast from EUR 58 billion previously to EUR 54 billion now. Our fair value
represents a 2025 P/E ratio of 36 times.

For the next decade we model a 10% compounded annual growth rate in revenue, with EBIT margins
expanding from 31% in 2023 to 45% in our terminal year. The continued long-term growth in
semiconductors will require existing and new fabs to keep acquiring and servicing lithography
equipment. Gross margin and EBIT margin expansion will come from the operating leverage of R&D and
operating expenses, more expensive EUV machines at better gross margins and an improvement in EUV
service margins, where ASML is focusing its efforts. EUV and high-NA EUV (to be launched in 2025)
have an estimated service revenue/equipment revenue ratio of more than 150% over their lifetimes,
compared with DUV’s 130%.

We believe ASML will continue to improve its EUV installed base management margins (service and
upgrades), which are currently dilutive to the group. The EUV service business did not get as much
focus as needed in the last decade, given the company was focused on making EUV technology a
reality. We surmise service customer retention rates are virtually 100% given the complexity of
lithography machines, so we believe ASML can keep upselling services, consumables, and upgrades.
The upgrade part of the installed base management business has high margins, although it can be
© Morningstar 2024. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions ®
presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The
opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting
ß
from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner,
without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and
governed by the U.S. Securities and Exchange Commission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report.
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ASML Holding NV ADR ASML QQQQ 15 Oct 2024 21:25, UTC

cyclical as customers are sometimes not willing to stop the machines and reduce productivity to
implement upgrades.

We expect 14% growth in 2025 and 13% growth in 2026, as some new orders are pushed into 2026. We
model slightly higher R&D and SG&A intensity compared with management’s long-term guidance as
ASML will have to keep investing in technology and productivity to justify the high price tag of its
machines.

Risk and Uncertainty Javier Correonero, Equity Analyst, 17 Apr 2024

We assign ASML a High Morningstar Uncertainty Rating.

ASML’s machines represent a large percentage (20% to 25%) of a semiconductor foundry's capital
expenditure. In most industries, customers will try to cut costs of their highest ticket items, so ASML
needs to provide unique productivity and service value to its customers. ASML manages this risk
through improvements in wafer-per-hour productivity and providing additional value every time it
charges for a new service. As long as the firm can keep providing technological and productivity
improvements to its customers, we believe this risk is under control, but the firm faces constant
pressure to deliver or clients will try to reduce their dependence on lithography.

Trade tensions between US and China are another headwind for ASML. Because ASML machines
contain US parts, the US has effective powers to limit ASML exports to China or any other country.
Restrictions have become stricter since 2023, with ASML being unable to sell some of its immersion
DUV machines. If export controls keep increasing, it will put long-term pressure on ASML’s top line.

ASML's supply chain management is also critical. If a critical part supplier like Carl Zeiss had
manufacturing disruption, this would create a bottleneck for ASML. Historically, ASML has displayed
good supply management abilities. The cyclical nature of the semiconductor industry adds to ASML's
uncertainty. ASML machines cost up to EUR 300 million, so clients will postpone purchases in times of
an economic slowdown. Customer concentration is high, with TSMC, Samsung, and Intel representing a
large amount of revenue.

ASML has little environmental, social, and governance risk. Its main risk is its difficulty attracting human
capital, but in our view this is properly managed through good compensation and company benefits.

Capital Allocation Javier Correonero, Equity Analyst, 17 Apr 2024

We give ASML an Exemplary Morningstar Capital Allocation Rating based on exceptional investments, a
healthy balance sheet, and appropriate shareholder distributions.

ASML has done a very good job investing to strengthen the competitive position of the firm. In 2012
ASML needed cash to keep funding R&D for its EUV machines and sold a 23% stake in the company to
© Morningstar 2024. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions ®
presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The
opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting
ß
from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner,
without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and
governed by the U.S. Securities and Exchange Commission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report.
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ASML Holding NV ADR ASML QQQQ 15 Oct 2024 21:25, UTC

its main clients TSMC, Samsung, and Intel. We believe this was smart as it allowed ASML to raise
necessary cash and also aligned customers with it. Also, in 2012 ASML acquired Cymer for EUR 1.95
billion, the supplier of the EUV light source, probably the most technically demanding part of ASML
machines. In our view, the acquisition was a good decision as it allowed ASML to invest money in the
firm to accelerate innovation and establish a product platform (EUV) that should last for decades. A EUR
1.95 billion price tag seems very cheap to us when observing the results one decade later. Sales of EUV
machines began in 2016.

In 2016 ASML acquired Hermes Microvision for EUR 2.75 billion, a metrology and inspection provider.
Although this is not a core product category for ASML, we view it as a good complementary acquisition.
Metrology tool providers like KLA Corporation can serve the same needs as Hermes Microvision, but the
acquisition is in line with ASML’s “holistic lithography” approach: the firm intends to help its customers
not only in the core lithography activities, but also in adjacent ones.

We believe ASML’s management team has long-term vision, which we like. In the early 2000s, there
was uncertainty about how to continue shrinking chip patterns and it was not clear EUV would be a
success. Management had a bold view and invested for more than a decade in EUV until it became
successful. CEO Pieter Wennink joined the company in 1999 and has been CEO since 2013. CTO Martin
van den Brink, who has been key to the company’s success, has worked in the company since its
foundation in 1984. Both mandates are expiring in 2024 and we expect successor Christophe Fouquet,
with 15 years of experience at ASML, will keep up with the long-term view.

ASML’s balance sheet is healthy. holding a net cash position for many years. Historically, the company
holds a cash position of EUR 4 billion to EUR 7 billion to fund working capital needs and has a cash
cushion for potential cyclical downturns. Part of ASML’s cash position is operating cash as it gets
prepayments from its customers to fund its expensive machines, something that reduces working
capital needs. ASML’s long-term debt has been stable at EUR 4 billion to EUR 5 billion since 2020.

From a shareholder distribution perspective, ASML balances dividend payments with share buybacks.
The main way to reward shareholders is through share buybacks; it has reduced outstanding shares by
10% since 2013. ASML has a systematic approach to share buybacks and we would like to see a more
opportunistic approach when shares are undervalued during cyclical swings. In November 2022, the
firm announced a new share buyback program to be executed by the end of 2025 up to EUR 12 billion.
ASML has been paying dividends since 2008 with payments fluctuating each year depending on the
company’s needs. ASML’s dividend for fiscal 2023 will be EUR 6.10 per share, compared with EUR 5.80
the year before.

Analyst Notes Archive

ASML Holding NV ADR ASML QQQQ 15 Oct 2024 21:25, UTC

Every Cloud Has a Silver Lining; We Recommend Investors Buy Shares of ASML and Besi Javier
Correonero, Equity Analyst, 5 Aug 2024
With global stocks declining sharply due to the possibility of a US recession, the decline among
semiconductor firms like wide-moat ASML and narrow-moat Besi has been particularly pronounced. We
believe this a rare opportunity to buy shares of two exceptional firms, with competitive advantages and
sound operations management. ASML and Besi offer a 28% and 20% upside to our EUR 900 and EUR
120 fair value estimates, respectively. In the case of a global recession, we expect both firms will remain
profitable through the cycle given their assembly business model, which provides cost flexibility during
periods of lower demand. Our 2025 EPS estimates for both companies are more conservative than
PitchBook consensus estimates as of early July.

ASML is now trading at 25 times the 2025 P/E, based on our EUR 28.6 EPS estimate for next year.
ASML’s backlog remained strong at EUR 39 billion at the end of the second quarter, giving certainty that
the company will deliver around the midpoint of its 2025 revenue guidance. Even if 2026 turns out to be
a weak year, the long-term trends supporting semiconductors remain strong, with ASML expecting
high-single-digit growth over the next decade, in line with our estimates.

Narrow-moat Besi is also trading at 25 times our 2025 estimates of EUR 3.90 EPS. Besi can maintain
outstanding levels of profitability during market downturns thanks to its highly flexible cost model,
moat, and focus. In the past 10 quarters, Besi has consistently maintained gross margins above 60%,
even during periods of double-digit sale declines, even higher than front-end peers ASML or Applied
Materials. Management expects flat sequential sales growth next quarter and more hybrid bonding
orders to come in the second half of 2024, which should result in a healthy order outlook for 2024. We
expect a 16% sales compound annual growth rate for Besi's revenue in the next decade, underpinned
by hybrid bonding growth.

ASML Holding: Heathy Orders Calm Investor Concerns and Attention Shifts to China: Valuation
Intact Javier Correonero, Equity Analyst, 17 Jul 2024
Although investor concerns regarding ASML’s order intake have been soothed after a healthy EUR 5.6
billion in bookings this quarter, attention has shifted to a new matter. Bloomberg reported that the US is
considering newer, more severe trade restrictions regarding semiconductors, which sent ASML shares
down 6% in June 17 trading. Other semiconductor stocks also declined on the news. The US may be
looking to implement a measure known as the foreign direct product rule, or FDPR, which would impose
controls on products using any kind of American technology, even if minor. Although we don’t discard
incremental trade restrictions for ASML, a heavy crackdown is not our base case, and we are
maintaining our EUR 900 fair value estimate. Even if more ASML systems are targeted, we expect China
will continue ordering nonrestricted DUV machines at high levels and exploit any loopholes in the supply
chain. If the US wants to effectively curb China’s advancements, it would also need to focus on other

ASML Holding NV ADR ASML QQQQ 15 Oct 2024 21:25, UTC

technologies beyond lithography such as advanced packaging, deposition or etching equipment, among
others.

ASML’s order bookings have given assurance that the firm should exceed the midpoint of its 2025
revenue guidance, in line with our estimates. According to management, ASML needed slightly more
than EUR 4 billion in average quarterly bookings during the last nine months of 2024 to reach the
midpoint, so the EUR 5.6 billion achieved this quarter provides a margin of safety. Orders include EUR
2.5 billion in EUV, which likely comes from equipment for TSMC’s 2nm node.

Sales and gross margins were slightly above guidance in the quarter, at EUR 6.24 billion and 51.5%,
respectively. Management guided for revenue of EUR 6.7 billion to EUR 7.3 billion next quarter, a 12%
sequential acceleration at the midpoint. It also reiterated its long-term guidance, which will be updated
in the November capital markets day. Our long-term forecasts are at the high end of management’s
2030 guidance.

ASML: Raising Our Fair Value Estimate to EUR 900; TSMC Adopting High-NA EUV Earlier Than
Expected Javier Correonero, Equity Analyst, 5 Jun 2024
We raise wide-moat ASML’s fair value estimate to EUR 900 from EUR 790 as we increase our long-term
revenue and EBIT forecasts. While our 2025 estimates remain unchanged we raise our long-term
revenue forecasts due to higher confidence in ASML’s long-term prospects and better certainty of high-
NA extreme ultraviolet adoption. Our fair value represents a 2025 P/E ratio of 31.5 times.

Our forecast was already at the high end of management’s 2030 guidance given their outlook seemed a
bit outdated as it was launched in November 2022, prior to the artificial intelligence boom. With ASML's
2030 revenue target spanning a wide range (EUR 44 billion-EUR 60 billion), we are confident it will get
close to the high end of its guidance and assume EUR 58.5 billion in sales compared with EUR 56.7
billion previously. We're also raising our stage 2 EBI growth rate assumption to 9%, from 7% previously,
given the semiconductor road map for node shrinking is set for the next 20 years. Lithography intensity
will continue growing in logic and memory markets as semiconductor patterns keep shrinking and
transistors keep transitioning to 3D structures.

Bloomberg News also reported on June 5 that wide-moat Taiwan Semiconductor Manufacturing, the
world’s most advanced logic foundry, will buy its first high-NA EUV machine by year-end, which
commands a unit price of EUR 350 million. This is a departure from TSMC’s previous narrative as in
January TSMC’s CEO and Chairman CC Wei expressed reservations regarding the adoption of high-NA
EUV. Wei’s comments suggested the technology wasn't mature enough and that TSMC "would make
the right decision at the right time." Although TSMC won’t adopt high-NA EUV in a manufacturing
environment until after 2026, the news increases our certainty of high-NA EUV long-term adoption given
that TSMC is the most sound foundry in the world, operationally. We surmise TSMC didn’t want to fall

ASML Holding NV ADR ASML QQQQ 15 Oct 2024 21:25, UTC

behind Intel, which became the first to adopt high-NA EUV in December 2023.

ASML’s Weak Bookings Don’t Obscure Its Long-Term Potential; Raising Fair Value to EUR 790 Javier
Correonero, Equity Analyst, 17 Apr 2024
ASML's weak new bookings of EUR 3.6 billion this quarter have left investors wondering where the
firm's 2025 sales, estimated between EUR 30 and 40 billion by management, will ultimately land. The
uncertainty on new bookings sent shares down 5% in early morning trading. The prior quarter had been
exceptional, with ASML booking all-time-high orders of EUR 9.2 billion, setting a high benchmark. In our
view, investors were overly optimistic last quarter and more pessimistic this quarter. ASML's new orders
are normally lumpy given the low volume and high price tag of extreme and deep ultraviolet lithography
machines, or EUV and DUV. What's clear to us is that ASML's long-term story remains unchanged,
supported, for instance, by new plans from customers TSMC and Samsung, which aim to invest more
than $20 billion each in additional fabs in the US, among other projects. Aside from equipment
shipments, management expects other tailwinds to kick in in 2025. These include the introduction of the
NXE:3800 EUV machine, which comes at higher average selling prices and gross margins; more
improvement in EUV service margins; and better operational leverage from higher volumes of high-NA
EUV machines. We raise our fair value estimate by 13% to EUR 790, supported by improved revenue and
margin forecasts long term. Our fair value estimate represents a 42 and 32 times forward 2024 and 2025
P/E ratio, respectively.

For 2025, our revenue forecast sits at EUR 36 billion, around the midpoint of management's guidance. In
the earnings call we sensed a more confident and less cautious tone from management than in recent
quarters, which gives us more confidence in our near-term forecast. To reach the midpoint of the 2025
guidance, ASML would need quarterly new bookings of around EUR 4 billion for the remainder of 2024,
which seems feasible considering there are several fab openings planned in 2025.

ASML Earnings: Strong Bookings of EUR 9.2 Billion Indicate a Healthy 2025, but 2024 Looks Flat
Javier Correonero, Equity Analyst, 24 Jan 2024
Wide-moat ASML's quarterly results surprised investors as it recorded very strong bookings of EUR 9.2
billion, sending the shares up 6% intraday. This comes after weaker bookings during the first nine
months of 2023 (EUR 10.9 billion cumulatively) as foundries moderated their tool orders given the overall
macroeconomic slowdown. We expect healthy orders through 2024 due to: (1) strong fab openings
expected in 2025 (Taiwan Semiconductor Manufacturing, Intel, and Samsung), and (2) strong demand
from Chinese customers in anticipation of further export restriction controls. Revenue from China has
seen a fourfold increase in the past two quarters and we expect Chinese demand will remain high
through 2024 for the same reason. Revenue and EBIT grew 30% and 39%, respectively, to EUR 27.6 and
EUR 9.0 billion for the full year. We expect only slight sales growth in 2024, in line with management’s
comments, followed by double-digit growth of almost 20% in 2025, with revenue reaching EUR 34.2
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ASML Holding NV ADR ASML QQQQ 15 Oct 2024 21:25, UTC

billion compared with management’s guidance of EUR 30 billion to EUR 40 billion. We maintain our EUR
700 fair value estimate, with shares trading in EUR 750 territory after the Jan. 24 results, representing a
33 times enterprise value/EBIT (2023) multiple.

We are not surprised by ASML’s fiscal 2024 flat revenue guidance, given TSMC said last week it expects
flat capital expenditure during fiscal 2024. However, TSMC confirmed it expects a 15% to 20%
compounded annual growth rate during the next few years at a similar capital intensity, which should
result in healthy demand for ASML’s tools in the long term. Installed base (service) revenue for the full
year was down 2% given lower activity in the upgrade business. We expect service revenue will be one
of the main drivers of ASML’s improved gross margin in the long term, given the historically lower focus
on this segment as the firm was prioritizing EUV research and development efforts.

ASML: Reinitiating Coverage; Wide Moat Backed by Technology, Research Budget, and Switching
Costs Javier Correonero, Equity Analyst, 20 Nov 2023
We reinitiate coverage of ASML, maintaining our EUR 700 fair value estimate and wide moat supported
by intangible assets, cost advantages, and switching costs. We believe ASML will remain the top
lithography provider for semiconductor foundries, or fabs, over the next 2 decades due to its
technological leadership, large research and development budget, which acts as a barrier to entry, and
high switching costs for fabs, whose plants are designed around ASML’s lithography machines. We also
maintain our Exemplary Morningstar Capital Allocation Rating for the firm. ASML shares are
undervalued by 10%, trading in EUR 630 territory.

We model 10% revenue CAGR and EBIT margins to expand from 31% in 2022 to 43% over the next
decade. We think ASML has room for margin expansion as 1) extreme ultraviolet lithography and high-
NA EUV represent a larger percentage of revenue, and 2) its installed base management (service and
upgrade) revenue and gross margins keep improving. Lithography machines are becoming more
complex as they need to keep up with Moore’s law, resulting in higher customer retention rates and
potential for upselling services.

ASML’s photolithography machines are a result of decades of internal know-how and R&D. An EUV
machine takes 18 months to build and has so many subsystems that one engineer can’t understand the
entire machine, only his/her area of expertise. A decade ago Taiwan Semiconductor Manufacturing
Company, Samsung, and Intel invested EUR 4 billion to fund the development of EUV and redesigned
their fabs for this, so they're heavily invested in ASML's technology. Canon and Nikon, ASML’s main
competitors, are well behind in terms of technology with much smaller R&D budgets. Despite having a
monopoly ASML provides value to customers by bringing down the cost per wafer through increased
productivity. This focus is crucial as customers need to see a return on investment when spending EUR
200 million-EUR 300 million on one EUV lithography machine. K

ASML Holding NV ADR ASML QQQQ 15 Oct 2024 21:25, UTC

Competitors Price vs. Fair Value

Applied Materials Inc AMAT

Fair Value: 193.00

16 Aug 2024 01:29, UTC
216
Last Close: 191.08
171 Overvalued
Undervalued
126

36
2019 2020 2021 2022 2023 YTD
1.03 1.17 1.11 0.89 1.07 0.99 Price/Fair Value
88.97 42.81 83.43 -37.47 67.68 18.59 Total Return %
Morningstar Rating

Total Return % as of 15 Oct 2024. Last Close as of 15 Oct 2024. Fair Value as of 16 Aug 2024 01:29, UTC.

KLA Corp KLAC

Last Close: 707.89

703 Fair Value: 670.00
25 Jul 2024 02:11, UTC

553 Overvalued
Undervalued
403

253

103
2019 2020 2021 2022 2023 YTD
1.11 1.23 1.09 0.92 1.14 1.06 Price/Fair Value
102.56 47.28 67.63 -11.25 55.60 22.53 Total Return %
Morningstar Rating

Total Return % as of 15 Oct 2024. Last Close as of 15 Oct 2024. Fair Value as of 25 Jul 2024 02:11, UTC.

ASML Holding NV ADR ASML QQQQ 15 Oct 2024 21:25, UTC

Competitors Price vs. Fair Value

Lam Research Corp LRCX

Fair Value: 83.00

1 Aug 2024 00:36, UTC
90
Last Close: 76.40
70 Overvalued
Undervalued
50

10
2019 2020 2021 2022 2023 YTD
1.33 1.18 1.00 0.68 1.19 0.92 Price/Fair Value
118.04 63.19 53.46 -40.66 88.13 -1.65 Total Return %
Morningstar Rating

Total Return % as of 15 Oct 2024. Last Close as of 15 Oct 2024. Fair Value as of 1 Aug 2024 00:36, UTC.

ASML Holding NV ADR ASML QQQQ 15 Oct 2024 21:25, UTC

Morningstar Historical Summary

Financials as of 30 Sep 2024
Fiscal Year, ends 31 Dec 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 YTD TTM
Revenue (EUR Bil) 5.86 6.29 6.88 8.96 10.94 11.82 13.98 18.61 21.17 27.56 19.00 26.24
Revenue Growth % 11.7 7.4 9.4 30.4 22.1 8.0 18.3 33.1 13.8 30.2 -6.5 -1.9
EBITDA (EUR Mil) 1,456 1,779 2,022 2,761 3,388 3,251 4,551 7,231 7,101 9,976 6,345 9,143
EBITDA Margin % 24.9 28.3 29.4 30.8 31.0 27.5 32.6 38.9 33.5 36.2 33.4 34.8
Operating Income (EUR Mil) 1,201 1,482 1,665 2,344 2,965 2,791 4,052 6,536 6,501 9,042 5,667 8,059
Operating Margin % 20.5 23.6 24.2 26.2 27.1 23.6 29.0 35.1 30.7 32.8 29.8 30.7
Net Income (EUR Mil) 1,197 1,387 1,558 2,067 2,592 2,592 3,554 5,883 5,624 7,839 4,878 6,926
Net Margin % 20.4 22.1 22.7 23.1 23.7 21.9 25.4 31.6 26.6 28.4 25.7 26.4
Diluted Shares Outstanding (Mil) 440 433 428 432 426 422 419 410 398 394 394 394
Diluted Earnings Per Share (EUR) 2.72 3.21 3.64 4.79 6.08 6.15 8.48 14.34 14.13 19.91 12.39 17.60
Dividends Per Share (EUR) 0.60 0.68 1.06 1.17 1.42 3.14 2.54 3.36 6.41 5.94 4.75 6.19

Valuation as of 30 Sep 2024

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Recent Qtr TTM
Price/Sales 6.3 5.6 7.2 7.5 5.6 10.2 12.1 16.3 10.4 10.1 11.5 11.5
Price/Earnings 28.4 25.2 36.5 31.4 23.8 49.8 50.0 53.2 36.9 35.5 43.5 43.5
Price/Cash Flow 34.5 24.3 31.2 32.2 23.5 83.3 46.9 31.9 21.5 35.5 58.8 58.8
Dividend Yield % 0.77 0.86 1.08 0.73 1.1 1.19 0.59 0.5 1.21 0.86 0.8 0.8
Price/Book 5.2 4.3 5.4 6.0 5.1 9.2 12.0 24.6 25.4 22.4 19.9 19.9
EV/EBITDA 31.1 21.2 22.6 27.2 19.5 38.5 44.8 44.5 30.5 29.8 0.0 0.0
Operating Performance / Profitability as of 30 Sep 2024
Fiscal Year, ends 31 Dec 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 YTD TTM
ROA % 10.1 10.9 10.2 11.7 13.5 12.1 14.2 20.5 16.9 20.6 — 17.5
ROE % 16.6 17.5 17.1 20.1 23.1 21.4 26.9 49.0 59.4 70.4 — 49.2
ROIC % 14.4 15.3 13.8 15.3 18.2 17.2 20.9 35.6 40.7 50.1 — 37.1
Asset Turnover 0.5 0.5 0.5 0.5 0.6 0.6 0.6 0.6 0.6 0.7 — 0.7
Financial Leverage
Fiscal Year, ends 31 Dec 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Recent Qtr TTM
Debt/Capital % 13.3 11.8 23.8 21.8 20.6 19.8 25.2 28.7 28.5 25.6 22.5 —
Equity/Assets % 61.6 63.1 57.1 59.2 57.8 55.6 50.8 33.5 24.3 33.7 38.7 —
Total Debt/EBITDA 0.8 0.6 1.6 1.1 0.9 1.0 1.0 0.6 0.6 0.5 — —
EBITDA/Interest Expense — — — — — 88.8 105.1 132.4 116.8 65.3 — —

Morningstar Analyst Historical/Forecast Summary as of 15 Oct 2024

Financials Estimates Forward Valuation Estimates
2022 2023 2024 2025 2026
Fiscal Year, ends 31 Dec 2023 2022 2023 2024 2025 2026
Price/Sales 9.6 9.8 11.1 9.7 8.6
Revenue (EUR Mil) 21,173 27,559 28,007 32,054 36,151 Price/Earnings 36.0 34.4 35.6 28.7 22.7
Revenue Growth % 13.8 30.2 1.6 14.5 12.8 Price/Cash Flow — — — — —
EBITDA (EUR Mil) 7,081 9,707 9,382 11,475 14,280 Dividend Yield % 1.3 0.9 1.3 1.5 1.7
EBITDA Margin % 33.4 35.2 33.5 35.8 39.5 Price/Book 23.0 20.1 16.9 14.7 12.5
EV/EBITDA 28.7 27.7 33.2 27.2 21.8
Operating Income (EUR Mil) 6,501 9,042 8,626 10,610 13,304
Operating Margin % 30.7 32.8 30.8 33.1 36.8
Net Income (EUR Mil) 5,624 7,839 7,370 9,074 11,366
Net Margin % 26.6 28.4 26.3 28.3 31.4
Diluted Shares Outstanding (Mil) 395 394 391 388 384
Diluted Earnings Per Share(EUR) 14.23 19.91 18.83 23.38 29.57
Dividends Per Share(EUR) 6.48 5.96 8.35 10.02 11.52

ASML Holding NV ADR ASML QQQQ 15 Oct 2024 21:25, UTC

ESG Risk Rating Breakdown

Exposure Subject Subindustry (36.0) u Exposure represents a company’s vulnerability to ESG

Company Exposure1 34.2 risks driven by their business model
34.2
u Exposure is assessed at the Subindustry level and then
– Manageable Risk 32.1 Low
2 0 55+ specified at the company level
Unmanageable Risk 2.0 u Scoring ranges from 0-55+ with categories of low, me-
Low Medium High
dium, and high-risk exposure

Management
u Management measures a company ’s ability to manage
Manageable Risk 32.1 ESG risks through its commitments and actions
79.2%
– Managed Risk3 25.5 Strong
u Management assesses a company's efficiency on ESG

Management Gap4 6.7 100 0 programs, practices, and policies

Strong Average Weak u Management score ranges from 0-100% showing how

Overall Unmanaged Risk 8.7 much manageable risk a company is managing

ESG Risk Rating ESG Risk Rating Assessment5

8.69
Negligible

Negligible Low Medium High Severe ESG Risk Rating is of Oct 02, 2024. Highest Controversy Level is as of Oct 08,
2024. Sustainalytics Subindustry: Semiconductor Equipment. Sustainalytics
ESG Risk Ratings measure the degree to which a company’s value is impacted by environmental, social, and governance provides Morningstar with company ESG ratings and metrics on a monthly
risks, by evaluating the company’s ability to manage the ESG risks it faces. basis and as such, the ratings in Morningstar may not necessarily reflect
current Sustainalytics’ scores for the company. For the most up to date rating
1. A company's Exposure to material ESG issues 2. Unmanageable Risk refers to risks that are inherent to a particular business model that cannot be managed by and more information, please visit: [Link]/esg-ratings/.
programs or initiatives 3. Managed Risk = Manageable Risk multiplied by a Management score of 79.2% 4. Management Gap assesses risks that are not
managed, but are considered manageable 5. ESG Risk Rating Assessment = Overall Unmanaged Risk = Management Gap plus Unmanageable Risk

Peer Analysis 02 Oct 2024 Peers are selected from the company's Sustainalytics-defined Subindustry and are displayed based on the closest market cap values
Company Name Exposure Management ESG Risk Rating

ASML Holding NV 34.2 | Low 0 55+ 79.2 | Strong 100 0 8.7 | Negligible 0 40+

KLA Corp 34.6 | Low 0 55+ 56.7 | Strong 100 0 16.2 | Low 0 40+

Lam Research Corp 34.2 | Low 0 55+ 68.2 | Strong 100 0 12.2 | Low 0 40+
Applied Materials Inc 34.0 | Low 0 55+ 70.1 | Strong 100 0 11.6 | Low 0 40+

— —|— 0 55+ —|— 100 0 —|— 0 40+

Appendix
Historical Morningstar Rating
December
ASML Holding November
NV ADR ASML October
15 Oct 2024 September
21:25, UTC August July May May April March February January

Dec 2024 Nov 2024 Oct 2024 Sep 2024 Aug 2024 Jul 2024 Jun 2024 May 2024 Apr 2024 Mar 2024 Feb 2024 Jan 2024
- - QQQQ QQQQ QQQ QQQ QQQ QQQ QQQ QQ QQ QQQ
Dec 2023 Nov 2023 Oct 2023 Sep 2023 Aug 2023 Jul 2023 Jun 2023 May 2023 Apr 2023 Mar 2023 Feb 2023 Jan 2023
QQQ QQQ QQQQ QQQQ QQQQ QQQ QQQ QQQ QQQQ QQQQ QQQQ QQQQ
Dec 2022 Nov 2022 Oct 2022 Sep 2022 Aug 2022 Jul 2022 Jun 2022 May 2022 Apr 2022 Mar 2022 Feb 2022 Jan 2022
QQQQ QQQQ QQQQQ QQQQQ QQQQ QQQQ QQQQQ QQQQQ QQQQ QQQQ QQQQ QQQQ
Dec 2021 Nov 2021 Oct 2021 Sep 2021 Aug 2021 Jul 2021 Jun 2021 May 2021 Apr 2021 Mar 2021 Feb 2021 Jan 2021
QQQ QQQ QQQ QQ QQ QQ QQQ - QQQ QQ QQQ QQQ
Dec 2020 Nov 2020 Oct 2020 Sep 2020 Aug 2020 Jul 2020 Jun 2020 May 2020 Apr 2020 Mar 2020 Feb 2020 Jan 2020
QQ QQ QQQ QQ QQ QQ QQ QQ QQ QQ QQ QQ
Dec 2019 Nov 2019 Oct 2019 Sep 2019 Aug 2019 Jul 2019 Jun 2019 May 2019 Apr 2019 Mar 2019 Feb 2019 Jan 2019
Q Q QQ QQ QQ QQ QQ QQ QQ QQ QQQ QQQ

December
Applied Materials November
Inc AMAT O
15ctober
Oct 2024 21:28, SeptemberAugust
UTC July May May April March February January

Dec 2024 Nov 2024 Oct 2024 Sep 2024 Aug 2024 Jul 2024 Jun 2024 May 2024 Apr 2024 Mar 2024 Feb 2024 Jan 2024
- - QQQ QQQ QQQ QQ QQ QQ QQ QQ QQ QQQ
Dec 2023 Nov 2023 Oct 2023 Sep 2023 Aug 2023 Jul 2023 Jun 2023 May 2023 Apr 2023 Mar 2023 Feb 2023 Jan 2023
QQQ QQQ QQQ QQ QQ QQ QQ QQ QQQ QQQ QQQ QQQ
Dec 2022 Nov 2022 Oct 2022 Sep 2022 Aug 2022 Jul 2022 Jun 2022 May 2022 Apr 2022 Mar 2022 Feb 2022 Jan 2022
QQQ QQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQ QQQ QQQ
Dec 2021 Nov 2021 Oct 2021 Sep 2021 Aug 2021 Jul 2021 Jun 2021 May 2021 Apr 2021 Mar 2021 Feb 2021 Jan 2021
QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQ QQ QQQ QQ
Dec 2020 Nov 2020 Oct 2020 Sep 2020 Aug 2020 Jul 2020 Jun 2020 May 2020 Apr 2020 Mar 2020 Feb 2020 Jan 2020
QQ QQQ QQQ QQQ QQQ QQQ QQQ QQQQ QQQQ QQQQ QQQ QQQ
Dec 2019 Nov 2019 Oct 2019 Sep 2019 Aug 2019 Jul 2019 Jun 2019 May 2019 Apr 2019 Mar 2019 Feb 2019 Jan 2019
QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQQ QQQ QQQQ QQQQ QQQQ

December
KLA Corp KLAC November
15 Oct 2024 October
21:26, UTC September August July May May April March February January

Dec 2024 Nov 2024 Oct 2024 Sep 2024 Aug 2024 Jul 2024 Jun 2024 May 2024 Apr 2024 Mar 2024 Feb 2024 Jan 2024
- - QQQ QQ QQ QQ QQ QQ QQ QQ QQ QQ
Dec 2023 Nov 2023 Oct 2023 Sep 2023 Aug 2023 Jul 2023 Jun 2023 May 2023 Apr 2023 Mar 2023 Feb 2023 Jan 2023
QQQ QQQ QQQ QQQ QQ QQ QQ QQQ QQQ QQQ QQQ QQQ
Dec 2022 Nov 2022 Oct 2022 Sep 2022 Aug 2022 Jul 2022 Jun 2022 May 2022 Apr 2022 Mar 2022 Feb 2022 Jan 2022
QQQ QQQ QQQQ QQQQ QQQQ QQQ QQQQ QQQ QQQQ QQQ QQQ QQQ
Dec 2021 Nov 2021 Oct 2021 Sep 2021 Aug 2021 Jul 2021 Jun 2021 May 2021 Apr 2021 Mar 2021 Feb 2021 Jan 2021
QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQ
Dec 2020 Nov 2020 Oct 2020 Sep 2020 Aug 2020 Jul 2020 Jun 2020 May 2020 Apr 2020 Mar 2020 Feb 2020 Jan 2020
QQ QQ QQQ QQQ QQQ QQ QQ QQQ QQQ QQQ QQQ QQQ
Dec 2019 Nov 2019 Oct 2019 Sep 2019 Aug 2019 Jul 2019 Jun 2019 May 2019 Apr 2019 Mar 2019 Feb 2019 Jan 2019
QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQQ QQQ QQQ QQQ QQQQ

December
Lam Research November
Corp LRCX 15 October
Oct 2024 21:26, September
UTC August July May May April March February January

Dec 2024 Nov 2024 Oct 2024 Sep 2024 Aug 2024 Jul 2024 Jun 2024 May 2024 Apr 2024 Mar 2024 Feb 2024 Jan 2024
- - QQQ QQQ QQQ QQ QQ QQ QQ QQ QQ QQ
Dec 2023 Nov 2023 Oct 2023 Sep 2023 Aug 2023 Jul 2023 Jun 2023 May 2023 Apr 2023 Mar 2023 Feb 2023 Jan 2023
QQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQQ QQQQ QQQQ QQQQ
Dec 2022 Nov 2022 Oct 2022 Sep 2022 Aug 2022 Jul 2022 Jun 2022 May 2022 Apr 2022 Mar 2022 Feb 2022 Jan 2022
QQQQ QQQQ QQQQ QQQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ
Dec 2021 Nov 2021 Oct 2021 Sep 2021 Aug 2021 Jul 2021 Jun 2021 May 2021 Apr 2021 Mar 2021 Feb 2021 Jan 2021
QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ
Dec 2020 Nov 2020 Oct 2020 Sep 2020 Aug 2020 Jul 2020 Jun 2020 May 2020 Apr 2020 Mar 2020 Feb 2020 Jan 2020
QQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ
Dec 2019 Nov 2019 Oct 2019 Sep 2019 Aug 2019 Jul 2019 Jun 2019 May 2019 Apr 2019 Mar 2019 Feb 2019 Jan 2019
QQ QQ QQ QQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ

Research Methodology for Valuing Companies

Overview turns on invested capital (or ROIC) over and above our es- rive our annual free cash flow forecast.
At the heart of our valuation system is a detailed projec- timate of a firm’s cost of capital, or weighted average
Stage II: Fade
tion of a company’s future cash flows, resulting from our cost of capital (or WACC). Without a moat, profits are
The second stage of our model is the period it will take
analysts’ research. Analysts create custom industry and more susceptible to competition. We have identified five
the company ’s return on new invested capital—the re-
company assumptions to feed income statement, balance sources of economic moats: intangible assets, switching
turn on capital of the next dollar invested (“RONIC”)—to
sheet, and capital investment assumptions into our glob- costs, network effect, cost advantage, and efficient scale.
decline (or rise) to its cost of capital. During the Stage II
ally standardized, proprietary discounted cash flow, or
Companies with a narrow moat are those we believe are period, we use a formula to approximate cash flows in
DCF, modeling templates. We use scenario analysis, inde-
more likely than not to achieve normalized excess returns lieu of explicitly modeling the income statement, balance
pth competitive advantage analysis, and a variety of other
for at least the next 10 years. Wide-moat companies are sheet, and cash flow statement as we do in Stage I. The
analytical tools to augment this process. Moreover, we
those in which we have very high confidence that excess length of the second stage depends on the strength of
think analyzing valuation through discounted cash flows
returns will remain for 10 years, with excess returns more the company’s economic moat. We forecast this period to
presents a better lens for viewing cyclical companies,
likely than not to remain for at least 20 years. The longer last anywhere from one year (for companies with no eco-
high-growth firms, businesses with finite lives (e.g.,
a firm generates economic profits, the higher its intrinsic nomic moat) to 10–15 years or more (for wide-moat com-
mines), or companies expected to generate negative
value. We believe low-quality, no-moat companies will panies). During this period, cash flows are forecast using
earnings over the next few years. That said, we don’t dis-
see their normalized returns gravitate toward the firm’s four assumptions: an average growth rate for EBI over the
miss multiples altogether but rather use them as support-
cost of capital more quickly than companies with moats. period, a normalized investment rate, average return on
ing cross-checks for our DCF-based fair value estimates.
new invested capital (RONIC), and the number of years
We also acknowledge that DCF models offer their own
When considering a company's moat, we also assess until perpetuity, when excess returns cease. The invest-
challenges (including a potential proliferation of estim-
whether there is a substantial threat of value destruction, ment rate and return on new invested capital decline un-
ated inputs and the possibility that the method may miss
stemming from risks related to ESG, industry disruption, til a perpetuity value is calculated. In the case of firms
shortterm market-price movements), but we believe these
financial health, or other idiosyncratic issues. In this con- that do not earn their cost of capital, we assume marginal
negatives are mitigated by deep analysis and our
text, a risk is considered potentially value destructive if its ROICs rise to the firm’s cost of capital (usually attribut-
longterm approach.
occurrence would eliminate a firm’s economic profit on a able to less reinvestment), and we may truncate the
cumulative or midcycle basis. If we deem the probability second stage.
Morningstar’s equity research group (”we,” “our”) be-
lieves that a company’s intrinsic worth results from the of occurrence sufficiently high, we would not characterize
the company as possessing an economic moat. Stage III: Perpetuity
future cash flows it can generate. The Morningstar Rating
Once a company’s marginal ROIC hits its cost of capital,
for stocks identifies stocks trading at a discount or premi-
2. Estimated Fair Value we calculate a continuing value, using a standard per-
um to their intrinsic worth—or fair value estimate, in
Combining our analysts’ financial forecasts with the petuity formula. At perpetuity, we assume that any
Morningstar terminology. Five-star stocks sell for the
firm’s economic moat helps us assess how long returns growth or decline or investment in the business neither
biggest risk adjusted discount to their fair values, where-
on invested capital are likely to exceed the firm’s cost of creates nor destroys value and that any new investment
as 1-star stocks trade at premiums to their intrinsic worth.
capital. Returns of firms with a wide economic moat rat- provides a return in line with estimated WACC.
Four key components drive the Morningstar rating: (1) our ing are assumed to fade to the perpetuity period over a
longer period of time than the returns of narrow-moat Because a dollar earned today is worth more than a dollar
assessment of the firm’s economic moat, (2) our estimate
firms, and both will fade slower than no-moat firms, in- earned tomorrow, we discount our projections of cash
of the stock’s fair value, (3) our uncertainty around that
creasing our estimate of their intrinsic value. flows in stages I, II, and III to arrive at a total present
fair value estimate and (4) the current market price. This
value of expected future cash flows. Because we are
process ultimately culminates in our singlepoint star rat-
Our model is divided into three distinct stages: modeling free cash flow to the firm—representing cash
ing.
available to provide a return to all capital providers—we
discount future cash flows using the WACC, which is a
1. Economic Moat Stage I: Explicit Forecast
weighted average of the costs of equity, debt, and pre-
The concept of an economic moat plays a vital role not In this stage, which can last five to 10 years, analysts
ferred stock (and any other funding sources), using ex-
only in our qualitative assessment of a firm’s long-term make full financial statement forecasts, including items
pected future proportionate long-term, market-value
investment potential, but also in the actual calculation of such as revenue, profit margins, tax rates, changes in
weights.
our fair value estimates. An economic moat is a structural workingcapital accounts, and capital spending. Based on
feature that allows a firm to sustain excess profits over a these projections, we calculate earnings before interest,
3. Uncertainty Around That Fair Value Estimate
long period of time. We define economic profits as re- after taxes (EBI) and the net new investment (NNI) to de-
Morningstar’s Uncertainty Rating is designed to capture
the range of potential outcomes for a company ’s intrinsic
Morningstar Equity Research Star Rating Methodology
value. This rating is used to assign the margin of safety
required before investing, which in turn explicitly drives
our stock star rating system. The Uncertainty Rating is
aimed at identifying the confidence we should have in as-
signing a fair value estimate for a given stock.

Our Uncertainty Rating is meant to take into account any-

thing that can increase the potential dispersion of future
outcomes for the intrinsic value of a company, and any-
© Morningstar 2024. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions ®
presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The
opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting
ß
from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner,
without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and
governed by the U.S. Securities and Exchange Commission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report.
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Research Methodology for Valuing Companies

thing that can affect our ability to accurately predict Morningstar Equity Research Star Rating Methodology
these outcomes. The rating begins with a suggested rat-
ing produced by a quantitative process based on the trail-
ing 12-month standard deviation of daily stock returns.
An analyst overlay is then applied, with analysts using
the suggested rating, historical rating data, and their own
knowledge of the company to inform them as they make
the final Uncertainty Rating decision. Ultimately, the rat-
ing decision rests with the analyst. Analysts take into ac-
count many characteristics when making their final de-
cision, including cyclical factors, operational and financial
factors such as leverage, company-specific events, ESG
risks, and anything else that might increase the potential
dispersion of future outcomes and our ability to estimate
those outcomes.

Our recommended margin of safety—the discount to fair

value demanded before we’d recommend buying or
selling the stock—widens as our uncertainty of the es-
timated value of the equity increases. The more uncertain
we are about the potential dispersion of outcomes, the
greater the discount we require relative to our estimate of
the value of the firm before we would recommend the
purchase of the shares. In addition, the Uncertainty Rat-
ing provides guidance in portfolio construction based on
risk tolerance. Once we determine the fair value estimate of a stock, we justed return is highly likely over a multiyear time frame.
compare it with the stock’s current market price on a Scenario analysis developed by our analysts indicates
Our Uncertainty Ratings are: Low, Medium, High, Very daily basis, and the star rating is automatically re-calcu- that the current market price represents an excessively
High, and Extreme. lated at the market close on every day the market on pessimistic outlook, limiting downside risk and maximiz-
which the stock is listed is open. Our analysts keep close ing upside potential.
Margin of Safety
tabs on the companies they follow, and, based on thor-
Qualitative Analysis
QRating ough and ongoing analysis, raise or lower their fair value QQQQ We believe appreciation beyond a fair risk-ad-
Uncertainty Ratings QQQQQRating
estimates as warranted. justed return is likely.
Low 20% Discount 25% Premium
Medium 30% Discount 35% Premium QQQ Indicates our belief that investors are likely to re-
Please note, there is no predefined distribution of stars.
High 40% Discount 55% Premium ceive a fair risk-adjusted return (approximately cost of
That is, the percentage of stocks that earn 5 stars can
Very High 50% Discount 75% Premium equity).
fluctuate daily, so the star ratings, in the aggregate, can
Extreme 75% Discount 300% Premium serve as a gauge of the broader market’s valuation. When
there are many 5-star stocks, the stock market as a whole QQ We believe investors are likely to receive a less than
Our uncertainty rating is based on the interquartile range, fair risk-adjusted return.
is more undervalued, in our opinion, than when very few
or the middle 50% of potential outcomes, covering the
companies garner our highest rating.
25th percentile–75th percentile. This means that when a Q Indicates a high probability of undesirable risk-adjus-
stock hits 5 stars, we expect there is a 75% chance that ted returns from the current market price over a multiyear
We expect that if our base-case assumptions are true the
the intrinsic value of that stock lies above the current time frame, based on our analysis. Scenario analysis by
market price will converge on our fair value estimate over
market price. Similarly, when a stock hits 1 star, we ex- our analysts indicates that the market is pricing in an ex-
time generally within three years (although it is im-
pect there is a 75% chance that the intrinsic value of that cessively optimistic outlook, limiting upside potential and
possible to predict the exact time frame in which market
stock lies below the current market price. leaving the investor exposed to Capital loss.
prices may adjust).

4. Market Price Our star ratings are guideposts to a broad audience and Other Definitions
The market prices used in this analysis and noted in the individuals must consider their own specific investment Last Price: Price of the stock as of the close of the mar-
report come from exchange on which the stock is listed goals, risk tolerance, tax situation, time horizon, income ket of the last trading day before date of the report.
which we believe is a reliable source. needs, and complete investment portfolio, among other
factors. Capital Allocation Rating: Our Capital Allocation (or
For more details about our methodology, please go to Stewardship) Rating represents our assessment of the
[Link] The Morningstar Star Ratings for stocks are defined be- quality of management’s capital allocation, with particu-
low: lar emphasis on the firm ’s balance sheet, investments,
Morningstar Star Rating for Stocks QQQQQ We believe appreciation beyond a fair risk ad- and shareholder distributions. Analysts consider compan-
© Morningstar 2024. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions ®
presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The
opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting
ß
from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner,
without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and
governed by the U.S. Securities and Exchange Commission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report.
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Research Methodology for Valuing Companies

ies’ investment strategy and valuation, balance sheet starting at zero (no risk) with lower scores representing vice to any specific investor. Therefore, investments dis-
management, and dividend and share buyback policies. less unmanaged risk and, for 95% of cases, the unman- cussed herein may not be suitable for all investors; in-
Corporate governance factors are only considered if they aged ESG Risk score is below 50. vestors must exercise their own independent judgment as
are likely to materially impact shareholder value, though to the suitability of such investments and recommenda-
either the balance sheet, investment, or shareholder dis- Based on their quantitative scores, companies are tions in the light of their own investment objectives, ex-
tributions. Analysts assign one of three ratings: "Exem- grouped into one of five Risk Categories (negligible, low, perience, taxation status and financial position. Morning-
plary", "Standard", or "Poor". Analysts judge Capital Alloc- medium, high, severe). These risk categories are absolute, star encourages Report recipients to read all relevant is-
ation from an equity holder’s perspective. Ratings are de- meaning that a ‘high risk’ assessment reflects a compar- sue documents (e.g., prospectus) pertaining to the secur-
termined on a forward looking and absolute basis. The able degree of unmanaged ESG risk across all subindus- ity concerned, including without limitation, information
Standard rating is most common as most managers will tries covered. relevant to its investment objectives, risks, and costs be-
exhibit neither exceptionally strong nor poor capital alloc- fore making an investment decision and when deemed
ation. The ESG Risk Rating Assessment is a visual representa- necessary, to seek the advice of a financial, legal, tax,
tion of Sustainalytics ESG Risk Categories on a 1 to 5 and/or accounting professional. The information, data,
Capital Allocation (or Stewardship) analysis published pri- scale. Companies with Negligible Risk = 5 Globes, Low analyses and opinions presented herein are not warran-
or to Dec. 9, 2020, was determined using a different pro- Risk = 4, Medium Risk = 3 Globes, High Risk = 2 Globes, ted to be accurate, correct, complete or timely. Unless
cess. Beyond investment strategy, financial leverage, and Severe Risk = 1 Globe. For more information, please visit otherwise provided in a separate agreement, neither
dividend and share buyback policies, analysts also con- [Link]/esg-ratings/ Morningstar, Inc. or the Equity Research Group repres-
sidered execution, compensation, related party transac- ents that the report contents meet all of the presentation
tions, and accounting practices in the rating. Ratings should not be used as the sole basis in evaluating and/or disclosure standards applicable in the jurisdiction
a company or security. Ratings involve unknown risks and the recipient is located.
Capital Allocation Rating: Our Capital Allocation (or uncertainties which may cause our expectations not to
Stewardship) Rating represents our assessment of the occur or to differ significantly from what was expected Except as otherwise required by law or provided for in a
quality of management’s capital allocation, with particu- and should not be considered an offer or solicitation to separate agreement, the analyst, Morningstar, Inc. and
lar emphasis on the firm’s balance sheet, investments, buy or sell a security. the Equity Research Group and their officers, directors
and shareholder distributions. Analysts consider compan- and employees shall not be responsible or liable for any
ies’ investment strategy and valuation, balance sheet Risk Warning trading decisions, damages or other losses resulting from,
management, and dividend and share buyback policies. Please note that investments in securities are subject to or related to, the information, data, analyses or opinions
Corporate governance factors are only considered if they market and other risks and there is no assurance or guar- within the report.
are likely to materially impact shareholder value, though antee that the intended investment objectives will be
either the balance sheet, investment, or shareholder dis- achieved. Past performance of a security may or may not The Report and its contents are not directed to, or inten-
tributions. Analysts assign one of three ratings: "Exem- be sustained in future and is no indication of future per- ded for distribution to or use by, any person or entity who
plary", "Standard", or "Poor". Analysts judge Capital Alloc- formance. A security investment return and an investor ’s is a citizen or resident of or located in any locality, state,
ation from an equity holder’s perspective. Ratings are de- principal value will fluctuate so that, when redeemed, an country or other jurisdiction where such distribution, pub-
termined on a forward looking and absolute basis. The investor ’s shares may be worth more or less than their lication, availability or use would be contrary to law or
Standard rating is most common as most managers will original cost. A security’s current investment performance regulation or which would subject Morningstar, Inc. or its
exhibit neither exceptionally strong nor poor capital alloc- may be lower or higher than the investment performance affiliates to any registration or licensing requirements in
ation. noted within the report. Morningstar’s Uncertainty Rating such jurisdiction.
serves as a useful data point with respect to sensitivity
Capital Allocation (or Stewardship) analysis published pri- analysis of the assumptions used in our determining a fair Where this report is made available in a language other
or to Dec. 9, 2020, was determined using a different pro- value price. than English and in the case of inconsistencies between
cess. Beyond investment strategy, financial leverage, and the English and translated versions of the report, the Eng-
dividend and share buyback policies, analysts also con- lish version will control and supersede any ambiguities
sidered execution, compensation, related party transac- General Disclosure associated with any part or section of a report that has
tions, and accounting practices in the rating. been issued in a foreign language. Neither the analyst,
Unless otherwise provided in a separate agreement, re-
cipients accessing this report may only use it in the coun- Morningstar, Inc., or the Equity Research Group guaran-
Sustainalytics ESG Risk Rating Assessment:The ESG tees the accuracy of the translations.
try in which the Morningstar distributor is based. Unless
Risk Rating Assessment is provided by Sustainalytics; a
stated otherwise, the original distributor of the report is
Morningstar company. This report may be distributed in certain localities, coun-
Morningstar Research Services LLC, a U.S.A. domiciled
financial institution. tries and/or jurisdictions (“Territories ”) by independent
Sustainalytics’ ESG Risk Ratings measure the degree to third parties or independent intermediaries and/or distrib-
which company’s economic value at risk is driven by en- utors (“Distributors”). Such Distributors are not acting as
This Report is for informational purposes, should not be
vironment, social and governance (ESG) factors. agents or representatives of the analyst, Morningstar,
the sole piece of information used in making an invest-
ment decision, and has no regard to the specific invest- Inc. or the Equity Research Group. In Territories where a
Sustainalytics analyzes over 1,300 data points to assess a Distributor distributes our report, the Distributor is solely
ment objectives, financial situation or particular needs of
company’s exposure to and management of ESG risks. In responsible for complying with all applicable regulations,
any specific recipient. This publication is intended to
other words, ESG Risk Ratings measures a company’s un- laws, rules, circulars, codes and guidelines established by
provide information to assist investors in making their
managed ESG Risks represented as a quantitative score. local and/or regional regulatory bodies, including laws in
own investment decisions, not to provide investment ad-
Unmanaged Risk is measured on an open-ended scale
© Morningstar 2024. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions ®
presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The
opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting
ß
from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner,
without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and
governed by the U.S. Securities and Exchange Commission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report.
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Research Methodology for Valuing Companies

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Research Methodology for Valuing Companies

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Common questions

ASML's installed base management strategy, which includes servicing, upgrading, and maintaining lithography machines, has significant positive implications for its long-term financial performance. The business generates recurring revenue as machines from the 1980s and 1990s continue to bring in service income, locking customers in for 20-30 years . This strategy ensures high customer retention rates and allows ASML to continue upselling additional services, consumables, and upgrades, thereby strengthening margins and contributing to sustainable financial growth .

The projected growth of 14% in 2025 and 13% in 2026 reflects ASML's strategic planning in response to anticipated industry demand fluctuations. This growth outlook aligns with the expected strong fab openings by companies like TSMC, Intel, and Samsung, which are slated for 2025, and the robust demand from Chinese customers foreseen due to potential export restrictions . ASML's focus on sustaining R&D and SG&A investments, despite periodic demand changes, underscores its commitment to innovation and maintaining its market leadership, which is crucial for capturing future growth opportunities .

ASML retains a competitive edge due to several factors, including the complexity and precision of its lithography machines, high customer switching costs, and a robust service and upgrade business. The lithography machines are a bottleneck in the semiconductor production process, and ASML's machines exhibit high uptime, with DUV machines achieving 97% and EUV getting close to 95% . This reliability, combined with a service revenue/equipment revenue ratio of more than 150% for EUV over the machine's lifecycle, and customer retention rates close to 100%, underscores ASML's strong competitive position . Additionally, the company's recurring revenue business model and long-term customer relationships further cement its market dominance .

The globalized semiconductor value chain impacts China's ability to compete with ASML by limiting access to the necessary connections, engineering talent, and know-how required to replicate ASML's high-precision lithography machines. Despite advancements, such as Shanghai Micro Electronics Equipment's claim of reaching the 5-nanometer process node, it remains highly debatable whether their machines can match ASML's manufacturing yield and uptime. China's lack of these critical elements constrains its ability to effectively compete at the level of precision and reliability offered by ASML .

Geopolitical factors, particularly concerning China, influence ASML's revenue projections and strategic decisions by driving a surge in demand as Chinese customers aim to mitigate the impact of potential export restriction controls . This geopolitical tension stimulates near-term demand increases, reflected in the fourfold revenue growth from China in recent quarters . Strategically, ASML must navigate these geopolitical challenges by balancing supply chain resilience and customer relations, as these factors play a critical role in underpinning future revenue stability and growth.

Several factors are expected to drive ASML's service revenue in the EUV segment to surpass equipment revenue. One major factor is the high complexity of EUV machines, which creates a demand for continual servicing, upgrades, and consumable supplies. The service revenue/equipment revenue ratio for EUV is over 150% across its lifetime, indicating that maintenance and upgrades constitute a significant portion of the revenue stream. Moreover, ASML's ability to maintain close to 100% service customer retention rates due to the machines' sophistication further reinforces this revenue model .

Customer retention significantly impacts the cost structure of ASML's lithography service business by ensuring a steady stream of recurring revenue without proportionately increasing costs. High retention rates, nearly 100% for ASML's service customers, allow the company to efficiently allocate resources towards servicing, upgrading, and providing consumables for existing machines . This established customer base reduces the need for costly new customer acquisition strategies, thereby optimizing the cost structure and enhancing profitability of the service business.

The economic moat of ASML, identified as wide, substantially influences its market position and growth prospects by safeguarding it from competitors and enabling it to maintain market dominance in the semiconductor industry. This moat is largely derived from its advanced technological capabilities, high precision, and reliability of its lithography machines, which are essential for semiconductor manufacturing . Additionally, ASML's focus on long-term customer relationships through high switching costs and a robust service and upgrade business further bolsters its competitive edge and supports its growth trajectory .

ASML's R&D and SG&A intensity play a crucial role in justifying the high price tag of its machines by enabling continuous technological advancements and productivity improvements. ASML must invest heavily in these areas to maintain and enhance the capabilities of its lithography machines to meet the evolving demands of semiconductor manufacturing, thereby justifying their cost. This investment is crucial as it supports the company's ability to sustain product excellence and provides a compelling value proposition to its customers, ensuring long-term financial returns and a justification for the pricing premium .

ASML faces challenges regarding customer willingness to implement machine upgrades, primarily due to concerns about reduced productivity from stopping machines for upgrades . These cyclical hesitations can lead to deferred revenue from the upgrades segment, potentially affecting ASML's short-term revenue growth. However, as technology advances and the necessity for higher machine capability becomes critical, customers may eventually prioritize upgrades to maintain competitiveness, alleviating these growth constraints in the long term.

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ASML's 2025 Outlook and Fair Value Cut

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ASML's 2025 Outlook and Fair Value Cut

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Morningstar Equity Analyst Report | Report as of 16 Oct 2024 01:05, UTC | Reporting Currency: EUR | Trading Currency: USD

| Exchange: NASDAQ - ALL MARKETS Page 1 of 23

ASML Holding NV ADR ASML QQQQ 15 Oct 2024 21:25, UTC

Price vs. Fair Value

Fair Value: 935.00

ASML Holding NV ADR ASML QQQQ 15 Oct 2024 21:25, UTC

Bulls Say Javier Correonero, Equity Analyst, 15 Oct 2024

ASML Holding NV ADR ASML QQQQ 15 Oct 2024 21:25, UTC

Fair Value Fair Value Fair Value

Bears Say Javier Correonero, Equity Analyst, 15 Oct 2024

ASML Holding NV ADR ASML QQQQ 15 Oct 2024 21:25, UTC

Economic Moat Javier Correonero, Equity Analyst, 17 Apr 2024

ASML Holding NV ADR ASML QQQQ 15 Oct 2024 21:25, UTC

ASML Holding NV ADR ASML QQQQ 15 Oct 2024 21:25, UTC

ASML Holding NV ADR ASML QQQQ 15 Oct 2024 21:25, UTC

Risk and Uncertainty Javier Correonero, Equity Analyst, 17 Apr 2024

Capital Allocation Javier Correonero, Equity Analyst, 17 Apr 2024

ASML Holding NV ADR ASML QQQQ 15 Oct 2024 21:25, UTC

Analyst Notes Archive

ASML Holding NV ADR ASML QQQQ 15 Oct 2024 21:25, UTC

ASML Holding NV ADR ASML QQQQ 15 Oct 2024 21:25, UTC

ASML Holding NV ADR ASML QQQQ 15 Oct 2024 21:25, UTC

ASML Holding NV ADR ASML QQQQ 15 Oct 2024 21:25, UTC

ASML Holding NV ADR ASML QQQQ 15 Oct 2024 21:25, UTC

Competitors Price vs. Fair Value

Applied Materials Inc AMAT

Fair Value: 193.00

KLA Corp KLAC

Last Close: 707.89

ASML Holding NV ADR ASML QQQQ 15 Oct 2024 21:25, UTC

Competitors Price vs. Fair Value

Lam Research Corp LRCX

Fair Value: 83.00

ASML Holding NV ADR ASML QQQQ 15 Oct 2024 21:25, UTC

Morningstar Historical Summary

Valuation as of 30 Sep 2024

Morningstar Analyst Historical/Forecast Summary as of 15 Oct 2024

ASML Holding NV ADR ASML QQQQ 15 Oct 2024 21:25, UTC

ESG Risk Rating Breakdown

Exposure Subject Subindustry (36.0) u Exposure represents a company’s vulnerability to ESG

Management Gap4 6.7 100 0 programs, practices, and policies

Overall Unmanaged Risk 8.7 much manageable risk a company is managing

ESG Risk Rating ESG Risk Rating Assessment5

— —|— 0 55+ —|— 100 0 —|— 0 40+

Research Methodology for Valuing Companies

Our Uncertainty Rating is meant to take into account any-

Research Methodology for Valuing Companies

Our recommended margin of safety—the discount to fair

Research Methodology for Valuing Companies

Research Methodology for Valuing Companies

Research Methodology for Valuing Companies

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Common questions

What are the implications of ASML's installed base management strategy on its long-term financial performance?

What are the implications of ASML's installed base management strategy on its long-term financial performance?

How does the projected growth in 2025 and 2026 reflect ASML's strategic planning amid industry demand fluctuations?

How does the projected growth in 2025 and 2026 reflect ASML's strategic planning amid industry demand fluctuations?

What factors contribute to ASML maintaining its competitive edge in the semiconductor manufacturing industry?

What factors contribute to ASML maintaining its competitive edge in the semiconductor manufacturing industry?

How does the globalized semiconductor value chain impact China's ability to compete with ASML in lithography machines?

How does the globalized semiconductor value chain impact China's ability to compete with ASML in lithography machines?

How do geopolitical factors influence ASML's revenue projections and strategic decisions for the coming years?

How do geopolitical factors influence ASML's revenue projections and strategic decisions for the coming years?

What factors are expected to drive ASML's service revenue surpassing equipment revenue in the EUV segment?

What factors are expected to drive ASML's service revenue surpassing equipment revenue in the EUV segment?

In what manner does customer retention impact the cost structure of ASML's lithography service business?

In what manner does customer retention impact the cost structure of ASML's lithography service business?

In what ways does the economic moat of ASML influence its market position and growth prospects?

In what ways does the economic moat of ASML influence its market position and growth prospects?

What role does ASML's R&D and SG&A intensity play in justifying the high price tag of its machines?

What role does ASML's R&D and SG&A intensity play in justifying the high price tag of its machines?

What challenges does ASML face regarding customer willingness to implement machine upgrades, and how might these affect its revenue growth?

What challenges does ASML face regarding customer willingness to implement machine upgrades, and how might these affect its revenue growth?