The semiconductor industry started 2024 with growing confidence that it left its latest cyclical downturn behind in 2023, and is hailing a “turning point” for the $600 billion market.

The latest figures from the Semiconductor Industry Association (SIA), which represents most global chipmakers, show that worldwide sales climbed to $48 billion in November, rising on both an annual and quarterly basis for the first time in more than a year. Monthly sales peaked above $50 billion during the first half of 2022.

The SIA’s World Semiconductor Trade Statistics unit forecast a “vigorous upswing” in 2024, with global revenues rising 13% to $588 billion.

However, only a handful of chip companies have enjoyed disproportionate gains. These few have benefited significantly from the seemingly insatiable demand for AI chips among both Big Tech companies and start-ups, such as OpenAI and Anthropic, over the past year. These companies include Nvidia (NVDA) and its suppliers, such as Taiwan Semiconductor Manufacturing (TSM) and Super Micro Computer (SMCI) .

But there is another company that is benefitting vastly from this boom in AI chips. Let me fill you in on this firm, which enjoys a near-monopoly in its niche.

ASML Holds a Near-Monopoly

ASML Holdings (ASML) is Europe’s most valuable technology firm. It currently is the only company that produces equipment needed to make the most sophisticated semiconductors. That’s why demand for its products is considered to be a bellwether for the industry’s health.

The company’s stock hit a record high recently after its orders more than tripled last quarter. In a year where utilization of semiconductor manufacturing capacity was depressed, ASML increased sales 30% to nearly $30 billion.

This reflects its privileged market position. With the long lead time on orders for its machines far outstripping its capacity to manufacture them, ASML could boost its shipments even in a soft year for the chip industry.

ASML’s order bookings rose to a record $9.98 billion in the fourth quarter from $2.82 billion in the third quarter, driven by demand for its most sophisticated machines. Last quarter's bookings far outpaced the average estimate of $3.9 billion among Wall Street analysts. Orders of its most advanced EUV lithography machines in the period were $6.07 billion.

The record number of orders for ASML’s top-of-the-line extreme ultraviolet (EUV) lithography machines came from the likes of Intel (INTC), Samsung Electronics, and Taiwan Semiconductor.

CEO Peter Wennick said artificial intelligence is going to be a “big driver for our business and the business of our customers.”

The need for high-performance memory chips — a bottleneck in realizing full AI potential, according to Wennick — also adds urgency for chipmakers to book EUV lithography systems, especially since it normally takes the company between 12 to 18 months to deliver an order of its flagship EUV system.

ASML Stock Is a Buy

ASML stock's rally to a record high illustrates how the chip equipment firm is cementing its place at the heart of the artificial intelligence (AI) boom. Nobody was expecting the company’s orders to come back so fast, not even the company itself. 

The reason why lies with its high bandwidth memory business, and all of this is driven by surging demand for AI infrastructure. If you want to see the impact of AI in the numbers of ASML, this is where it lies.

On a one-year view, ASML’s shares appear expensive. It currently trades at 40 times next year’s earnings, well above its five-year average. But that ratio comes down to historical levels (about 25 times) when 2025 earnings are taken into consideration. This is the year that the company has repeatedly said it will see “very significant” growth.

ASML is betting on — and investing in — a renewed chip boom in 2025. Fourth-quarter orders were about three times larger than analysts had expected. That underpins about half of 2025 revenues. The majority of new orders relate to ASML’s newest “EUV” machines. These should expand gross margins by about 300 basis points to between 54% and 56% in 2025.

Recent generation EUV lithography machines from ASML cost about $200 million. The upcoming machine (High NA), due to ship in 2024, costs more than $300 million. High NA (numerical aperture) will be used for manufacturing very high-end chips in very tiny process technology: 3 nm (nanometer) and 2 nm.

ASML remains cheaper than a number of key AI enablers, based on a ratio that factors in next three years’ of earnings growth.

The company’s near-monopolistic position in advanced lithography surrounds it with a Buffett-like moat, protecting profitability. And its technology is essential to manufacture advanced AI-enabling chips, giving it a strong long-term growth outlook.

Demand from new chip fabs around the globe should comprise over half of shipments in 2025, supporting strong growth projections along with a record backlog, which I expect to keep growing in 2024.

In summary, ASML has no EUV competitors in sight, and it will extend its lead with further advancements (EUV High-NA) coming online in 2025. The company also holds a high market share in less advanced DUV lithography systems that are considered to be the workhorse of the semiconductor industry. And its machines can last more than 30 years, providing recurring service revenue.

Longer term, the chip industry is set to grow from megatrends such as AI and electrification, and ASML’s key role in lithography positions it as a prime beneficiary.

Like TSM, I expect ASML to outpace the growth of the overall semiconductor market, thanks to its strong competitive position. Buy ASML anywhere up to $887 a share.