Analysis-Could AI chip boom make ASML Europe's first trillion-dollar firm?

THE TRILLION-DOLLAR QUESTION

Analyst upgrades after the second quarter show it's no pipe dream. Barclays, Susquehanna and Bernstein now have 12-month price targets above $2,600 per share - a 49% rise from current levels and the rough threshold for a $1 trillion market cap.

ASML is the only seller of extreme ultraviolet (EUV) lithography tools required ⁠to print the minute circuitry of the most advanced logic and memory chips. Investors compare its business to selling picks and shovels during a gold rush.

John Lamb of Capital Group, whose funds hold around ​5% of ASML shares worth $35 billion, praised it as a long-term holding for its "unique assets and wide moats".

"The fundamentals for the industry as a whole appear stronger than ever and ASML occupies a critical space," he said.

ASML has overtaken ​and is now streaking away from other leading European companies Roche, LVMH, Novo Nordisk, ‌AstraZeneca and SAP.

ASML COULD BENEFIT FROM AN 'UPGRADE CYCLE'

Shares trade at 38 times forecast earnings for 2027, according to LSEG data, well above multiples for top ASML customer TSMC, which manufactures the AI chips designed by Nvidia and used by OpenAI, Anthropic ⁠and the hyperscaler firms.

ASML investors and analysts said to justify the premium and grow into that valuation several things need to go right, notably continuing hyperscaler demand.

Trent Masters of Alphinity Investment Management, which has about 3% of its portfolio in ASML, warned that "any cooling of this will flow through to ASML's earnings".

He said other threats include ASML's ability to ⁠manage its supply chain and geopolitical risks, though he is "on balance very positive" about the company's outlook.

U.S. lawmakers have proposed the MATCH Act, a law that could curtail ASML's ​sales and servicing of equipment in China - a market where ASML expects to have 20% of sales in 2026.

Analysts said there are also reasons ASML could keep growing even amid an AI slowdown.

Kinngai Chan of Summit Insights Group said AI memory chip makers such as SK Hynix, Samsung and Micron are shifting production away from processes that use ASML's ‌older DUV tools toward new and pricier EUV tools, a profitable "upgrade cycle".

ASML "can surely be" Europe's first trillion-dollar firm, ING analyst Marc Hesselink said.

And then there is the possibility that chip demand accelerates. The new Terafab plant planned by Elon ‌Musk in Texas to supply SpaceX and Tesla represents a new source of revenue for ASML.

Antoine Hucher of Aviva Investors said if the company executed its strategy well and ⁠AI demand held up, ASML would keep growing, though nothing was ‌certain.

"ASML could well become the first European company ​to reach a $1 trillion market cap," he said. "However, the volatility we have seen with AI stocks in the last few weeks suggests the journey to this achievement won't be a straight line."