A Small Bet on the #2 Horse

Brit Ryle

Posted March 15, 2024

Engineering marvels tend to be small. Microscopic nanotech robots, sub-atomic qubits for quantum computing, transistors so small you can put 15 billion of them on an iPhone chip, and that chip so small it actually fits in an iPhone…

But one of most advanced engineering feats of engineering is massive: 

That machine weighs 330,000 pounds. It took 250 crates to move. And it took a team of 250 engineers 6 months to put it together. 

Of course, this machine was invented to make things small. It’s a lithography machine from the Dutch company ASML (NASDAQ: ASML) and it uses lasers to etch circuits onto semiconductor wafers that are just 7 nanometers wide. 

Taiwan Semiconductor (NYSE: TSM) already uses this machine’s predecessor to make the Nvidia (NASDAQ: NVDA) GPUs that power AI applications. This new machine will make the next generation of AI-capable chips, starting in 2025.  

The first of these new lithography machines – using a process called High-NA Extreme Ultraviolet (EUV) lithography – has already been delivered to Intel (NASDAQ: INTC). 5 more are on their way, at a cost of approximately $380 million each. 

Its engineering prowess gives ASML a near monopoly on lithography machines for semiconductor fabrication. It has a 60% share of the entire lithography market, and a total stranglehold on high-end chips. 

A Couple Bucks on the #2 Horse

For investing, it pays to ride the #1 horse. You buy the top companies for the long run – the ones that have proven they can grow revenue through innovation and a keen understanding of their market and customers. And also manage costs to increase profitability. 

But that doesn’t mean you can’t throw a couple bucks at the #2 horse. Sometimes they pay off big. 

In lithography, the #2 horse is Canon (CAJPY). 

Canon lithography machines are not made for the high-end semiconductor market. Canon has secured its 30% share of the lithography market by supplying machines for less sophisticated chips for 5G networks, Internet of Things, and RF Power devices. 

So Canon does not compete with ASML in the high end of the chip market. But it wants to…

At the end of last year, Canon announced a new machine that may be capable of making some inroads on the high-end chip space. It’s called “nanoimprint lithography” and it means stamping the circuits onto the wafer, instead of etching like AMSLs machines.

It’s a pretty different approach, and it can’t cut circuits as small as ASMLs machines do. But Canon’s new machines seem like they could be competitive for smartphone and PC chips. With so much focus on AI chips right now, Canon could add some market share, especially with customers with AI aspirations that have trouble getting the latest tech from ASML (China?). 

Canon’s new machines are half the price of ASML’s.

Canon’s new machine was announced in mid-October of 2023.

As you can see, the stock didn’t move very much on the news. It was mostly range bound between $23 and $25 until the market took off higher in mid-November. Canon shares have rallied up to $29.50 so far this year. 

There’s hardly any revenue growth expected for fiscal 2025, about 2%. But that’s why the stock could be an opportunity. There seems to be almost no revenue expected from this new machine. Even a small foothold could make for an upside surprise for Canon’s 2025 revenue. And the stock is cheap, with a market cap at 1:1 with its trailing 12-month revenue. 

A couple bucks on the #2 horse could pay off nicely. 

Briton Ryle
Chief Investment Strategist
Pro Trader Today
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