ASML's Undervaluation Amid AI-Driven Semiconductor Demand: A Technical Monopoly with Margin and Geopolitical Upside

The semiconductor industry is at an inflection point. The rise of artificial intelligence (AI) and high-performance computing (HPC) has created insatiable demand for advanced chips, yet only one company holds the keys to the most critical technology enabling this revolution: ASML Holding N.V. (ASML). Despite its dominant position in extreme ultraviolet (EUV) lithography—a technical monopoly with no viable substitutes—the stock trades at a P/E ratio of just 29.76x trailing twelve months (TTM), far below its potential revaluation. This article argues that near-term dips present a compelling buying opportunity, as ASML's pricing power, margin expansion trajectory, and geopolitical resilience position it for a long-term re-rating to 30x+ P/E, implying over 50% upside.

Technical Monopoly: The EUV Imperative

ASML's crown jewel is its EUV lithography technology, indispensable for manufacturing chips at 7nm and smaller nodes—the foundational building blocks of AI and HPC systems.

. Today, 90% of advanced logic chips and cutting-edge DRAM rely on EUV, and no competitor—not Nikon, not Canon—can replicate this capability.

The company's backlog, a key leading indicator, remains robust at €38 billion as of Q1 2025, driven by orders for its next-gen High-NA EUV systems (EXE:5200), which began shipping in Q2 2025. These machines enable 3nm and smaller nodes, critical for AI accelerators and HPC servers. While EUV sales dipped to 38% of net system sales in 2024 (from 42% in 2023), the decline reflects a temporary pause in customer capacity expansions. With hyperscalers like Amazon, Google, and Meta racing to build AI data centers, demand for EUV is set to rebound. ASML's CEO, Christophe Fouquet, recently stated: “AI is spurring growth and shifting market dynamics… the logic segment will lead growth in 2025.”

Margin Expansion: Pricing Power and the Installed Base

ASML's profitability is accelerating. Gross margins are projected at 50–53% in 2025, with a long-term target of 56–60% by 2030. . This expansion is fueled by two factors:

1. Pricing Power in EUV: ASML's monopoly allows it to command premium pricing. A single High-NA EUV system costs $250 million, 50% more than prior-gen tools. With AI-driven demand pushing customers to bid up for capacity, margins will grow as High-NA adoption scales.

2. Installed Base Revenue: Services, upgrades, and spare parts now account for 40% of ASML's revenue and carry 70%+ margins. This recurring revenue stream is expanding as the installed base of EUV systems grows—there are now over 500 ASML tools globally, with 80% operating at 300mm wafer fabs.

Even with near-term headwinds—such as tariffs adding €100 million in costs in 2025—the trajectory is clear. CFO Roger Dassen noted: “Installed base revenue is growing double digits in 2025… we're not trading at a multiple that reflects this.”

Geopolitical Resilience: Diversification Beyond China

A key concern for investors is ASML's exposure to China, which accounted for 49% of revenue in Q2 2024 before U.S. and Dutch export controls slashed this to an expected 20% in 2025. However, this risk is overblown.

• Market Diversification: Sales to Taiwan and South Korea now account for 50% of revenue, with foundries like TSMC and Samsung ramping 2nm production. The U.S. CHIPS Act and EU's semiconductor subsidies are further driving demand outside China.
• Compliance and Adaptation: ASML has strictly adhered to export controls, redirecting capacity to approved markets. While DUV sales to China fell 48% year-over-year in 2025, this pain is temporary. By 2030, ASML's 2030 sales scenarios of €44–60 billion assume no material China contribution—a testament to its ability to thrive elsewhere.

The geopolitical tailwind? The U.S. and China are both investing in domestic semiconductor ecosystems, indirectly boosting ASML's sales. U.S. foundries need EUV to compete with TSMC, while China's inability to develop EUV forces it to rely on ASML's older tools—a trade ASML can profitably make under existing rules.

Valuation: A 30x+ Multiple Awaits

ASML trades at 29.76x TTM earnings, below its five-year average of 33x and far below peers like Applied Materials (30.66x) and Lam Research (24.22x). Yet its moat—technical, economic, and geopolitical—is wider than any of them.

Consider the catalysts: - AI Demand Surge: Each $1 billion of AI-related semiconductor revenue requires ~$200 million in lithography capital expenditure. With AI spending forecast to hit $150 billion by 2027, ASML's backlog will grow. - Margin Expansion: A 56% gross margin by 2030 would boost EPS by 20–25% annually, even at flat revenue growth. - Multiple Reversion: If ASML's P/E expands to 33x (its historical average), the stock would rise 11%. If AI tailwinds push it to 40x—a reasonable multiple for a monopoly—this implies a 34% upside.

Investment Conclusion: Buy on Dips, Target 30x+

The Q2 2025 earnings (July 16) will likely reaffirm ASML's backlog strength and margin trajectory. . Near-term risks—geopolitical noise, macroeconomic softness—are already priced in.

Actionable advice: Accumulate ASML on dips below $650. The $770–$820 resistance levels (seen in Q1 2025) are the first targets, with a long-term horizon of $1,100–$1,400 as the P/E re-rates. For bulls, the “worst case” is steady 15% annual EPS growth—already reflected in the current valuation. The upside, however, is asymmetric: ASML's EUV monopoly and AI tailwinds could deliver 20%+ EPS growth annually.

In a world of chip shortages and AI gold rushes, ASML is the ultimate “moat stock.” Its undervaluation is an anomaly—it won't last.