September 2023
The Jensen Global Investment Team recently added ASML Holding (“ASML”) to the Global Quality Growth Strategy.
ASML was originally named ASM Lithography and was founded in 1984 as a joint venture between chip manufacturing equipment company Advanced Semiconductor Materials International (“ASMI”) and Dutch electronics company Philips. The company was listed on the Amsterdam and NASDAQ stock exchanges in 1995 and became independent in 1998.
ASML is, in our assessment, one of the most essential semiconductor production equipment (“SPE”) manufacturers worldwide. The company makes highly sophisticated machines needed for the manufacturing of computer chips. More specifically, ASML is the undisputed leader in Extreme Ultraviolet (“EUV”) lithography, which is a critical technology for making the world’s most advanced computer chips. ASML has a 100% market share in EUV technology.1
The SPE industry benefits from strong secular demand drivers. Advanced computer chips are found in many more devices beyond traditional personal computers, such as mobile phones, data centers, cars, gaming consoles and artificial intelligence (“AI”) applications. The growing demand for more powerful computing also drives demand for more powerful and complex computer chips. Advanced computer chips, including those powering AI applications, are made with tools from ASML.
As the global leader in EUV technology, ASML is, in our opinion, protected by a wide economic moat. Major competitors have tried to enter the EUV market but have had limited success. ASML prices its products to value, not cost, and its gross margins have increased from 41.5% in 2013 to 50.5% in 2022 and stand at 51%,2 suggesting strong pricing power. ASML’s long-tenured company leadership has consistently opted to return capital to investors through dividends and share buybacks. ASML’s recurring service business will, we believe, increasingly contribute to drive ASML’s growth and profitability while lowering its volatility.
ASML has many of the qualitative business aspects that we at Jensen seek to identify. These include high barriers to entry due to decades of accumulated knowledge and larger-than-peers’ R&D budgets in its chosen niche areas of focus, patents, and an established ecosystem of partner companies. High switching costs due to both the absence of a direct competitor product and due to the risk of interrupting well-running chip production processes and scale advantages further cement its competitive position.
Due to its attractive fundamental business characteristics, its proven long-term history of shareholder value creation and our valuation work that aims to identify long-term attractive investment opportunities, we are pleased to add the name to the Portfolio.
2 Refinitiv Eikon
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Strategy holdings are subject to change and should not be considered recommendations to buy or sell any security.
The discussion of the specific security identified in this article is solely intended to illustrate the application of our investment approach. Our views expressed herein are subject to change and should not be construed as investment advice and are not designed or intended as a basis or determination for making any investment decision for any security. This information is current as of the date of this material and is subject to change at any time, based on the market and other conditions. Past performance is no guarantee of future results.
Jensen Investment Management, Inc., is an investment adviser registered under the Investment Advisers Act of 1940. Registration with the SEC does not imply any level of skill or training.
© 2023 Jensen Investment Management.
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