ASML

ASML

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-$330.71 -44.07%
September Idea Competition: Process Control for the Semicon Industry
You may have heard about $ASML, but what about $KLAC?

Electronics are more relevant and strategic than ever and this will remain a reality for many years to come.

The demand for electronics continues strong with no sign of slowing down. We have many examples of companies from multiple industries with huge orders backlog in queue just waiting for electronics supplies.

If you are aware of it, then it shouldn’t be a surprise that the US approved $52B in manufacturing subsides that for sure will cause great impact the industry in the future (we may talk more about this in a further post).

However, before all this investment starts to generate returns, we may take some time to know the major players that already play a big role supplying the infrastructure and technology that enables semiconductor manufacturing today and in the future.

KLA Corporation develops equipment and provide end-to-end services in the electronics manufacturing process, from wafers and reticles to ICs, PCBs, flat panel displays and packaging.

This company core business – Semiconductor Process Control – that represents ~85% of the revenues, allowed them to differentiate from competition and establish a wide moat market leadership, holding 54.4% of the Market Share in a field expected to grow even more than the Wafer Fab Equipments (WFE), expertise from $ASML.

If I’ve learned something from studying Tech companies, is that Service is the way. Recurring revenues give companies a very welcomed revenue previsibility and also help them to create more value to their products and fidelize customers with a complete solution and experience. KLA not only understand this very well, as it executes. This is one of the foundations of the company, since 22% of the revenue come from services.

What also influence its leadership position, in an ever-growing demand environment, forecasted to an exponential growth of ~11% CAGR of revenues expected from 2012 to 2026.

Together with an operational excellence, the company have consolidated its leadership position with higher margins than its peers, including $AMAT, $ASML & $LRCX.

Accordingly, KLA delivered a stupendous profitability growth and cash flow generation in the last years, marked by the context of constraints in the semiconductor supply chain.

Thanks to this strong cash generation, the company is able to generate value and return capital to shareholders through constantly growing share repurchases and dividends distribution. In the end of the last quarter, it was announced a new $6B repurchase authorization and 24% dividend increase to $1.30/share.

From the 2022 full-year earnings report, $KLAC have $50.0B Market Cap, $3.7B EBIT, $21.92 Diluted EPS, $3.0B Free Cash Flow, no bond maturities until 2024 and a long-term debt of $6.7B compared to a cash position of $2.7B.

What implies in a ~15x EV/EBIT, P/E and P/FCF, very solid multiples for an expressively growing tech company.

Therefore, we can get to the conclusion that KLA Corporation have strong both top and bottom-line growth over the last decade, especially in the last 3 years, and have seized very well its wide moat position, as seen in its high margins, specialized market leadership, healthy balance sheet, growing profitability and shareholder return.

As it is now, KLA Corporation checks all the boxes of a great company to generate value in the long term.

#investing #commonstock
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Good overview, Mako! $KLAC is a high-quality company with the benefit of experiencing less cyclicality than the usual practice in the past for the semi industry. On my watch list long-time ago. Same applies to another company you can have a look at $LRCX. Below is a quick snapshot of both companies different metrics and valuations.

Image upload
Source: Koyfin
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Leandro's avatar
$130.9m follower assets
Capital Returns part 2: Growth and Value
Last week, I uploaded a post on some topics discussed in the book Capital Returns. You can read that post here.

This week, I did the second part, which you can find below. Hope you enjoy it and if you do be sure to leave an upvote and a comment with your thoughts!

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The theory of the Capital Cycle states that returns mean revert once capital and competition flood into an industry.

However, some elite companies are able to repel competition for very long periods, delaying mean reversion longer than the market expects

Growth eventually becomes value after an industry is flooded with capital

"One person's growth stock is another's value stock."

This is a known fact, but stocks should not be grouped as growth or value. If the market is inefficient valuing their future growth prospects, there's always value, irrespective of growth.

Long term investors have less competition than short term "investors" because they tend to ask the right questions and focus on what's important. There's a lot of data out there, but not all is really relevant for the LT

Asking the right questions helps tune out the noise.

Short term data points have fierce competition, as Wall Street relies on short termism to make money

Industries where there is an agent between the seller and the end customer can be profitable for investors, as the seller can bribe the agent to exploit consumer ignorance

"Customers will often pay more when agents are involved."

Historically, semiconductors have been very exposed to capital cycles.

I highly doubt it will be different this time, but I wrote an article not long ago talking about why $ASML might be protected. You can find it here.

Despite semiconductor cycles, the analog industry has managed to provide less-volatile returns, aided by low capital intensity. $TXN $ADI

One of the reasons for outperformance is the strong moat enjoyed by analog companies.

First, the talent pool is constrained and rather static, making it difficult for a new entrant to compete in R&D

The analog industry is diversified across end markets and products typically make up a small portion of the customer's budget.

This last part, joint with the high barriers of entry, gives the companies pricing power as competition is based on quality, not price

When prices make a small part of a customer's total costs, there's pricing power. The product should also be mission critical and switching costs must be high

"Intrinsic pricing power is created when price is not the most important factor in a customer's purchase decision."

A technological moat can appear to be stronger than it really is, so it must be combined with other competitive advantages.

Take for example $ASML, the moat is not only tech but also the complexity of the supply chain and its exclusivity agreements with critical suppliers

Despite mean reversion risk, higher rates of return are typically safer than lower rates

ST investors should not worry too much about high returns, as other things (macro, news...) will move the stock over their holding period.

LT investors should care quite a bit, though. Over the LT, macro and news matter less for high quality companies and returns take over

The problem in focusing on P/E ratios is that all earnings are seen as equal, when in reality earnings are worth more when ROIC and FCF conversion are higher

Pick one:
  1. P/E = 15, FCF conversion = 90%, ROIC = 25%
  2. P/E = 15, FCF conversion = 60%, ROIC = 15%

Indispensable products in unglamorous activities might be a good fishing pond for two reasons:

  1. Customers don't typically focus on price
  2. Unglamorous means that capital is more likely to be absent, reducing competition

Some examples of industries with the above characteristics

  1. Analog semis
  2. Payroll processing companies
  3. CAD / CAM
  4. Flavor and fragrance companies
  5. Specialty chemical
  6. Laboratory supplies

Leaders in the above industries tend to appear to be "fully-priced", but this is rarely the case as the market tends to estimate a faster mean reversion.

Hope you enjoyed the post!
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Leandro's avatar
$130.9m follower assets
$ASML has a tendency for neurodiverse people
$ASML's CTO, Martin van der Brink, is dyslexic:

“I’m so dyslexic that I can’t even write a sentence.”

This didn't stop him from pioneering one of the most (if not the most) advanced technologies in the history of humankind (EUV).

In fact, people who are neurodiverse (those with dyslexia, autism, ADHD...) are highly valued at $ASML as they typically exhibit characteristics that are crucial for the job:

The company shared the case of Arnout Nederpelt, who suffers autism and had trouble getting through job interviews. He then landed a job at $ASML, where he has been for 12 years:
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Performance 9/1/22
Down -3.24% for the day

$MDB brought down saas and $NVDA $AMD chip Brought down semi stocks

Also reorganized my growth portfolio into two sections

Compounders:

Hyper-growth:
I haven’t gone over the earning reports which I’ll do over the weekend. My instinct is to wait and see, cause $SNOW being up 20+ percent is as insane as $MDB being down 20+ percent. The volatility isn’t a great indicator. As for cybersecurity companies $CRWD $ZS $NET $S are all eating into each other business and I’m really not sure which comes on top so I’m probably build starter positions in all of them and spend more time researching.
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Ben's avatar
$17.7m follower assets
Aug Update
Pretty slow Aug. didn’t add much new cash.
Had that month where everything in your house breaks. Lightning strike, AC repairs, rock through the window.

Sells:none

Plan for the end of year. If markets keep giving me sales I’ll keep adding to the above names. Also plan on initiating a new position in $TREX at some point.
If markets go up, I’ll slow buying and build a cash pile for the next market down turn. Currently less than 1% cash.
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TSMC and its dwindling tech advantage
$TSM gained tech superiority in the chip foundry business by installing ASML's EUV photolithography machines before all the other chip foundry companies started installing them in their own factories.

As companies like $INTC $GFS $UMC and other chip foundry businesses start asking $ASML for their latest lithography machines, the tech advantage that TSMC has will diminish.

Sure, TSMC might be able to get first dibs on ASML's latest machines, but sooner or later, the other chip companies will get their hands on those machines too.

So where will TSMC get its tech advantage?

Will TSMC start making deals with even smaller semiconductor equipment companies hoping to strike a deal with the next ASML? Because that seems like the surest path to securing the next level of tech superiority in the chip foundry business.
$TSM has the same advantage as $WMT. Nothing is proprietary. Lots of foundries and more coming online. But they are the biggest in an important growing industry.

With that said I’d prefer, and do, own $ASML
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StockOpine's avatar
$41m follower assets
$KLAC profitability
$KLAC which is specialized in semiconductor process control consistently has higher Gross Margins and Operating Margins than the average of $AMAT , $ASML and $LRCX explained by product differentiation and operational excellence.

Not 100% competitors but that says something.
We are not questioning $ASML EUV wide moat which is one of the strongest out there but we like seeing $KLAC cost efficiencies and the value it adds to its customers.
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Leandro's avatar
$130.9m follower assets
$AAPL manufacturing chips?
Does $AAPL have more ambitions than design when it comes to chips?

According to a former employee, some $ASML employees are going to $AAPL

Source: Alphasense
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