After a strong rally from multiyear lows in early October, shares of ASML are falling once again. While tech stocks have been selling off in general in the last few days of the year, ASML shareholders have an extra reason to worry: Chinese tech giant Huawei just filed for a patent on the same type of advanced chipmaking equipment ASML has a monopoly on.
For a long time, it has been believed that ASML's lead is so great that no competitors will be able to catch up. There is a suggestion that ASML could lose its privileged status, but not so quickly. There is much more to this story.
According to a report from Taiwanese media outlet UDN, there is a patent for EUV equipment in China. ASML's EUV technology is currently the only one that works, though its predecessor technology has some competition.
EUV makes it possible to make chips with transistors that are just a few nanometers in size. Our phones and computers are powered by chips designed at this level. ASML has been in the lead when it comes to EUV technology know-how for a long time.
As critical as EUV has become, it's mind- bogglingly complex equipment to develop. The world's largest chip fabrication company, Taiwan Semiconductor Manufacturing, as well as South Korea's memory chipmakers, are planning to use the EUV setup. ASML's relationship with these chipmaking partners could be in danger.
It's not the same as building a working piece of equipment if you file a patent only for use in China. ASML took many years to complete a working EUV prototype and many more years after that to actually sell its most advanced machines. If the patent is granted, the company has a document. The EUV machine needs to be built. Many thousands of critical and specialized parts are made in the U.S. where there are restrictions on exports of advanced chipmaking technology to China.
The company still has a steep hill.
There's also the issue of ASML's current China business. It hasn't been able to sell EUV machines to mainland China for the last few years, and there is no indication that will change in the near future. EUV is not being sold to Chinese customers in the first place. You can't lose something you have.
It would first need to convince companies like Taiwan Semi,Samsung, Intel, and the like to ditch a very deep and long-term relationship with ASML if it was to have a long-term threat of exporting EUV equipment from China. I don't think ASML would lose a lot of orders. An EUV machine costs a lot of money. It's too expensive to take a risk with that equipment.
I don't want ASML shareholders to panic-sell on this news. The company is not in immediate danger. The long-term growth outlook for ASML is still intact.
Nicholas Rossolillo has positions in two technology companies. The Motley Fool has positions in several companies. The long January 2023 $52.50 calls on Intel are one of the recommended options. There's a disclosure policy at the Motley Fool.
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