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Investment Insight Series – Disruptive growth example: ASML Holdings NV

Investment Insight Series

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We’ve taken an introductory look at the characteristics Sarasin use to classify companies under consideration for investment and explored the first example of defensive franchises.  

The next category is disruptive growth businesses. Our example from within the Sarasin portfolio is ASML Holdings NV, a leader in the semiconductor industry. 

Here’s the description we shared of typical disruptive growth businesses: 

  • Companies with the ability to attack large entrenched profit pools with a superior product or service. 
  • These businesses may not generate high returns on capital when investing to drive growth, but can be enormous creators of shareholder value. 

ASML provide chipmakers with everything they need – hardware, software and services. They are the world leader in lithography machine (a core piece of equipment needed to manufacture a computer chip) with more than 90% of the global market share. (This is closer to 100% for the latest generation of machines.) ASML remains the critical bottleneck for more powerful, cheaper processing and storage of data through improved semiconductors.  

In terms of internal structure and strategy, CEO Peter Wennick has been with ASML since 1999 and has steered the company excellently over the last 20 years, for a ‘moderate’ salary of around five million Euros; the board is wholly independent; and non-audit fees have been low (around 3% of total fees).  

Factors supporting the investment case for ASML include: 

Long-term opportunity for growth. In order to remain competitive, semiconductor companies and foundries need to invest in the latest lithography equipment. Each machine from ASML costs more than $110million. 

Industry structure. There is no viable alternative. Competitors Nikon and Canon are permanently ‘off the pace’ with developing new machines for the critical layers of semiconductor manufacturing.  

Additional factors. Moore’s Law suggests that the number of transistors on a microchip will double every two years. This rapid increase in semiconductor processing power drives strong, ongoing opportunity for growth.  

Hopefully the example of ASML gives an insight into the particular factors at play in a disruptive growth business, but these corporate characteristics are only one of the criteria Sarasin consider when approaching investment opportunities.  

ASML have a strong focus on education, the intersection of art and technology and are part of a collective united in a joint approach to several urgent societal challenges where they’re based in the Netherlands, such as poverty, vitality, unemployment, opportunities for children, and social cohesion.  

As experts in the responsible investment arena, Sarasin actively engage with the businesses within their portfolios through an ongoing screening process – their high thresholds must be consistently met.  

Next time we’ll look at an example of a cyclical franchise: Schneider Electrical SE.