Artificial intelligence (AI), and specifically, generative AI, has fundamentally changed the tech industry. These breakthroughs have shifted the tech economy and are on track to bring significant productivity gains.

Many investors believe such a transformation is not possible without one company, and the company usually cited is Taiwan Semiconductor (TSMC). However, it would not be possible for TSMC to manufacture its most advanced chips without equipment provided by semiconductor equipment maker ASML (ASML 1.61%).

Interestingly, ASML has struggled recently despite its market power. Its total returns slightly beat the S&P 500's performance over the last five years. Still, given ASML's importance, a closer examination of the company may offer clues as to whether it can outperform the market over the next five years.

Image source: ASML.

ASML and the AI market

ASML produces machines that, in turn, produce semiconductors. At the lower end of the market, it competes with companies like Lam Research and Applied Materials.

Nonetheless, it stands out with its leadership in extreme ultraviolet lithography (EUV), the technology that allows foundries to build the world's most advanced semiconductors. No company has matched ASML's prowess in EUV machines, including Huawei, which wants to skirt the export bans that limit ASML's ability to sell in China.

Amid its market power, its highest-end EUV machines reportedly sell for more than $400 million, and its clients spend billions every year on machine maintenance. As an essential product, these companies have to do business with ASML.

Over time, demand is on track to rise significantly. Grand View Research forecasts a compound annual growth rate (CAGR) of 29% for the AI chip market through 2030. That should bode well for ASML's sales for the remainder of the decade.

However, the only companies competing to build the most advanced chips are TSMC, Samsung, and lately, Intel. Even though additional foundries may buy its less-advanced equipment, the company can only sell equipment to a small number of clients.

Moreover, the pace of foundry construction drives cyclicality in this business. The shortage of AI chips is likely to result in increased business for TSMC and, by extension, ASML. Still, Intel's recent cutbacks could have weighed on ASML's near-term financial performance.

ASML by the numbers

Indeed, the numbers point to significant cyclicality. In the first half of 2025, revenue of 15.4 billion euros ($18.0 billion) rose by 34% compared to the same period in 2024. Increases in net service sales and net service and field option sales drove the revenue surge. It also resulted in a 53.7% gross margin, up from 51.2% over the same period.

ASML also kept cost and expense growth in check during that time frame. Consequently, its net income for the first two quarters of the year was more than 4.6 billion euros ($5.4 billion).

Despite those gains, the outlook for the year's second half has become bleaker. The company expects 15% annual net sales growth for 2025, with gross margins pulling back to 52%. That news led to the stock dropping after the Q2 earnings announcement, and its stock has yet to recover from that decline.

Still, such pessimism has taken ASML's P/E ratio to 28. That is a multiyear low and far below the 41 average over the previous five years. That potentially sets up new shareholders to benefit from multiple expansion as the market for AI-ready semiconductors grows.

ASML in five years

Over the next five years, ASML is likely to outperform the market.

Indeed, ASML faces a near-term slowdown, and the fact that it fell slightly short of the S&P 500's returns over the last five years is somewhat concerning.

Nonetheless, ASML's EUV machines are a crucial part of meeting the rapidly growing demand for AI chips. Thus, even if the industry faces some short-term cyclicality, the company's financials and stock performance should trend higher at a relatively rapid pace.

Additionally, the fact that ASML trades at a discounted valuation will likely add to the returns. Between the growth rate of its industry and the discounted valuation, investors who buy now and hold for five years will likely be glad they became long-term shareholders of ASML.