Moat? What Moat?

Wall Street’s “Dean of Valuation,” Aswath Damodaran wrote a beautiful and insightful book called “Narrative and Numbers”. Insightful in the sense that narratives drive a company’s underlying story and thus its valuation. Essentially, the better the narrative, the more people are willing to pay for a company, which drives the valuation.

The ongoing narrative behind ASML is its monopoly in the lithography business. Nothing happening in the AI or GPU space would be possible without them. That simple narrative drives the valuations of ASML. However, that narrative has broken down recently. What happened?

While the world was focusing on the US government's crackdown on ASML, middle of October something just slipped through the cracks. Even people on X missed it and there is hardly any mention of it in the mainstream media. What if I told you that ASML now has a worthy competitor in Canon? Yes, it is here, and it costs one-tenth of an ASML EUV machine.

Canon said its latest machine, called the FPA-1200NZ2C, will be able to make semiconductors equivalent to a 5-nanometer process and go as small as 2-nanometer.

Lithography machines are key to effectively printing the design of a chip onto the material that ends up going into the semiconductor. ASML’s machines use ultraviolet light during that process. Canon said its machine does not require a light source with a special wavelength, reducing power consumption.

I have a whole bunch of engineers following me on X. Hey, they know. It just comes out. How can one hide one’s background? One of the kids said that ASML’s stuff is better and faster. I retorted that I would buy five of Canon’s stuff and still get the job done and also save 50% along the way.

Ranting aside, it is pretty much clear that the simple narrative behind ASML has broken down. That entails a relook at the valuation being attributed to ASML.

While Washington and the powers-be talk about export restrictions, they are actively allowing Nvidia chips and SMCI servers into China. It is just a farce. Hey, Pelosi even has hundreds of millions of dollars worth of calls riding on NVDA. It is just a farce. Talking up a good game is not the same as actually playing the game. It doesn’t take long for people to smoke out a fake.

People on X think that I am some forensic accounting god. I am just a simple engineer. I picked up the accounting along the way as I had to get projects approved and explain the numbers to the finance guys. I chuckle when people on X call me a forensic accounting genius. However, it is not surprising given what I did with SMCI.

SMCI hit my radar in February as it failed the Beneish M-Score. Yup, the Enron buster. So I emailed Dr. Beneish, creator of the M-Score, Dean of Accounting at the Kelley School of Business, and asked what was up with SMCI and if he could provide any guidance. His response was short and simple: Why is Cash from Operations lower than Net Income? By the time I got to writing about SMCI in May, it was all like WOW, what is going on here, and the rest is history.

Circling back to ASML. I am gonna keep it simple with this one. ASML’s issues are similar to SMCI's from an accounting perspective. Cash from operations is consistently lower than Net Income for the recent quarters and even when you look yearly. That is a major red flag. Now ASML is a foreign issuer and their reporting is unlike how an American company reports, hence, it becomes hard to decipher what the underlying issue is.

I highlighted the “Change in Other Net Operating Assets” as it stood out and there is no commentary around it and what the heck it is. That is why I dither from covering a foreign issuer. The disclosures are neither here nor there and pretty much scant.

There is no point in doing a valuation exercise on ASML. What is the Total Addressable Market (TAM)? Disclosures are scrappy and Cash from Operations is less than Net Income. And given Canon’s new product there is no narrative behind holding ASML anymore. I wouldn’t be surprised if this company has issues in the future.