ASML: priced for miracles

Yesterday, I said the figures to watch were forward demand, not headline sales. ASML delivered its strongest signal yet on the former, alongside record quarterly sales and margins. But the share-price response has been more restrained than the operational story might suggest.

Q3 net sales were €11.66bn, towards the top of €11–12bn guidance. Net income reached €4.96bn, while gross margin hit a record 57.5%, above the 55–57% guidance range. Up from 54% in Q2.

The margin improvement is particularly telling. Installed Base Management sales, servicing existing systems and upgrading their productivity, reached €3.29bn, around €400m above the company's guidance. ASML's CFO identified this upgrade business as the principal driver of the stronger margin.

Q4 guidance is €14.2–15.2bn in sales, with gross margin around 57%. Full-year guidance has tightened to €44–45bn from €43–45bn: the floor has risen, while the ceiling is unchanged.

This is a strong operating quarter. But the headline earnings figure needs one qualification: roughly €510m of investment-related gains, including the revaluation of ASML's Mistral AI stake, was recognised separately from operating income. The underlying business performed well; but the investment gain should not be mistaken for recurring profit.

ASML is also reportedly pressing its pricing power directly. South Korean media outlet The Elec reported that ASML had sought a roughly 10% increase in replacement-part prices for Samsung and SK Hynix, effective from January 2027. The company has not confirmed the reported increase.

If implemented as reported, this would reinforce the economics of ASML's installed base: customers cannot readily substitute another supplier's components into highly specialised lithography systems already operating in their fabs.

The scale matters. Installed Base Management generated €8.19bn in 2025, approximately a quarter of annual revenue. It provides a substantial recurring revenue stream, and demand for productivity upgrades helped lift this quarter's margins.

But one reported price increase on replacement parts is not evidence of a 10% rise across ASML's business. The direction is encouraging though.

This was the most important statement in the results.

ASML said its currently planned supply for both 2027 and 2028 would not fully meet customer demand. CEO Christophe Fouquet added that some customers were expressing interest in placing orders for 2029 and even 2030.

That is a meaningful escalation in demand visibility. ASML had already communicated plans to increase capacity, but management is now investigating ways to expand 2028 capacity beyond its previous plans. Even that may not eliminate the shortfall.

The distinction is between demand and commitments. Customer forecasts and discussions about 2029 or 2030 are not equivalent to firm orders for those years. Nevertheless, the combination of rising order-book momentum, constrained supply and customers planning further ahead supports the structural bull case.

High-NA EUV provides a longer-term technological underpinning. These next-generation lithography systems are designed to print finer features, enabling further advances in chip manufacturing. Intel has progressed with High-NA technology in manufacturing, while Samsung plans to introduce it into DRAM high-volume manufacturing by 2028. TSMC has stated that it intends to use High-NA EUV in advanced-node high-volume manufacturing from 2030.

These are important milestones, but they remain different stages of adoption, not a simultaneous industry-wide transition.

The significance is that customers are planning their technology roadmaps years ahead, while ASML is already confronting constraints in its ability to supply existing demand. The opportunity is substantial; execution and capacity remain the limiting factors.

ASML shares fell around 4.2% on Tuesday with the wider semiconductor sector, then rallied around 3% on Wednesday after the results, recovering most of the prior day's drop. The initial decline came against a weak chip backdrop; the post-results move was clearly positive, though the shares still sit roughly 10% below their 52-week high of €1,741.

A one-day move proves little either way: a single session cannot show whether the market is re-rating the business or simply unwinding the prior day's sell-off. Semiconductor shares have been volatile as investors reassess the pace of AI-related investment, and South Korea and Taiwan, heavily exposed to the memory and foundry names in the AI cycle, can amplify the swings. Even very strong operating news competes with positioning, macro conditions and the expectations already in the valuation.

TSMC's forthcoming results are another important data point for the sector, particularly for the sustainability of AI-related capital expenditure.

At roughly 58× earnings, ASML is priced for sustained exceptional execution.

That does not make the shares overvalued. ASML occupies a singularly strong position in the semiconductor supply chain, has formidable technological barriers to entry and benefits from the rising complexity of advanced chip manufacturing.

But the valuation changes the burden of proof. Investors are not simply paying for a good business; they are paying for a business that will deliver robust growth for years to come.

At this level, confirming the trajectory is not the same as beating it. Earnings can rise substantially while the shares underperform if the market had anticipated even stronger growth, better margins or faster conversion of future demand into orders and revenue.

There is another reason to look beyond the headline earnings number.

ASML's CFO confirmed that approximately €500m of the quarter's net income included a gain from revaluing the first tranche of its investment in Mistral AI. ASML originally invested €1.3bn in the French AI company in 2025, acquiring an approximately 11% stake on a fully diluted basis.

The gain reflects the higher valuation assigned to that investment. It is a legitimate accounting outcome, but it is not recurring operating profit from lithography equipment, nor should it be treated as evidence that the core business has become more profitable by the same amount.

There is a wider point here. ASML is benefiting from the AI cycle both through demand for its machines and through the changing valuation of an AI company it has backed. That second exposure is small relative to core operations, but it can rise or fall independently of the equipment business.

The correct response is not to dismiss the gain, but to separate it from the operating result when judging the sustainability of earnings.

ASML's structural position remains compelling: demand is outrunning planned supply, gross margins have reached a record, installed-base upgrades are contributing meaningfully to profitability, and customers are already discussing capacity requirements years ahead.

The risks are equally clear. Capacity expansion takes time. Long-dated customer interest is not the same as contracted revenue. High-NA adoption will depend on manufacturing economics as well as technical capability. And at a premium valuation, the stock has little room for execution that is merely good rather than exceptional.

The central question is no longer whether ASML is an exceptional business. It is how much of that exceptionalism remains unpriced.

For my own part, I will not be adding to my position on today's news, at this valuation, even a great quarter has a very high bar to clear. But make no mistake about the business itself: ASML is in an immensely strong position, and its customers, quite literally, have nowhere else to go.

ASML has given investors its clearest signal yet that demand could exceed supply well beyond the near-term. But when a company trades on very lofty expectations, qualitative confidence cannot replace measurable order conversion.

The next test is whether the strength of the demand commentary translates into sustained earnings growth and whether that growth is sufficient to justify the price.

Disclosure: I am a long-term holder of ASML and other semiconductor shares.

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