ASML Holding N.V. (NASDAQ:ASML) sits in one of the most unusual positions in the technology industry. It does not make chips, design processors, or operate data centers. Instead, it makes the machines that chipmakers use to manufacture their most advanced chips. And when it comes to the most advanced form of chipmaking, ASML is effectively the only supplier that matters.
In mid-July, we published an article about best stocks to buy for high returns. ASML ranked sixth on that list. The #1 stock in that list returned more than 15% since the article was published, less than 3 months ago. ASML Holding N.V. has returned 4% in that period.
ASML has a monopoly in EUV lithography
The semiconductor industry has spent decades making transistors smaller and more powerful. At some point, printing those increasingly tiny patterns on a chip became so difficult that conventional manufacturing techniques were no longer enough. ASML developed extreme ultraviolet, or EUV, lithography to solve that problem. EUV uses extremely short-wavelength light to print finer patterns, allowing chipmakers to manufacture advanced processors with fewer complicated manufacturing steps.
Developing EUV took years of research and an ecosystem of highly specialized suppliers. It is not something a competitor can simply decide to build. ASML has accumulated the technology, manufacturing expertise, and customer relationships needed to produce these systems at commercial scale.
That is the real source of its moat.
TSMC, Samsung and Intel can compete fiercely with one another, but they still need increasingly advanced lithography equipment to manufacture their leading-edge chips. ASML’s machines therefore become more important as the semiconductor industry gets more complicated.
DON’T MISS: 10 Stocks That Will Change the World by 2030
And right now, that is exactly what is happening.
ASML generated EUR 9.3 billion of revenue in the second quarter, up 21.3% year-over-year, while net income reached EUR 2.9 billion. The company raised its 2026 revenue outlook to EUR 43 billion to EUR 45 billion as customers increase capacity for advanced logic and memory. Management expects EUV system sales to grow more than 45% this year, while memory-related system sales are expected to increase more than 75%.
The bigger opportunity may be that AI is making ASML’s technology more important, rather than less.
AI accelerators require advanced manufacturing nodes, while high-bandwidth memory is pushing memory manufacturers toward more sophisticated processes. As chips become harder to manufacture, they require more lithography. ASML said customers are already planning capacity for 1.4-nanometer chips, while advanced logic and DRAM are both seeing increasing lithography intensity.
There is also another layer to ASML’s moat. Once its machines are installed, customers need upgrades, maintenance and services to keep them productive. Installed-base revenue reached EUR 2.8 billion in the second quarter, nearly EUR 300 million above guidance, and the company expects that business to grow more than 30% this year.
ASML is also working on High-NA EUV, the next generation of EUV technology. Intel is already using a High-NA system on its 18A process to produce some Core Ultra Series 3 processors. That does not guarantee a smooth transition, but it is an important sign that ASML is trying to extend its technological lead rather than simply defend its existing business.
But the moat does not eliminate the risks
The biggest risk is still the semiconductor cycle. ASML’s customers can be aggressive when demand is strong and suddenly become much more cautious when chip demand or pricing weakens. China is another complication. Management expects China to account for around 20% of 2026 sales, while restrictions on advanced semiconductor equipment can limit what ASML is allowed to sell into the country.
High-NA also needs to prove its economics. ASML says the technology should eventually become more cost-effective than combining existing EUV with multiple patterning steps, but that depends on the technology reaching sufficient maturity.
Then there is the valuation.
ASML trades at about 28.9x forward earnings. That number looks reasonable only if the earnings denominator actually gets much larger. In effect, investors are not paying 28.9x for the ASML that exists today. They are paying for a business whose earnings are expected to nearly double from the trailing level.
If AI demand continues to drive more advanced chipmaking and ASML’s next-generation machines keep lifting earnings, 28.9x forward earnings may not look that expensive in hindsight. But if semiconductor spending cools before those earnings come through, investors could still end up paying too much, even for a company with ASML’s competitive advantage.
Conclusion
ASML’s moat is unusually difficult to challenge because it was built around technology that took decades to develop and is becoming more important as chips get harder to manufacture. AI is strengthening that demand, while High-NA could extend ASML’s lead further.
At 28.9x forward earnings, though, investors are already assuming a much larger ASML several years from now. The business has one of the strongest positions in technology. The question is whether its future earnings growth can catch up with the expectations already embedded in the stock.
Market Sentiment
Hedge fund sentiment toward ASML strengthened in the second quarter. According to Insider Monkey’s database, 140 hedge funds held the stock in Q2, up from 133 in Q1, while the value of those positions increased from $16.38 billion to $21.77 billion. Both the number of hedge funds and the capital invested moved higher, suggesting institutional investors became more positive on ASML despite its premium valuation.
READ NEXT: Jim Cramer Expects Marvell’s (MRVL) Next Move to Get the Chip Industry Talking and SpaceX Is About to Spend $53 Billion on AI. Evercore Sees an $83 Billion Payoff
This article is originally published at Insider Monkey.
