ASML Has A Hidden Growth Driver And Its Not High-NA. Here's What Investors Are Missing

ASML Holdings is the world’s sole manufacturer of extreme ultraviolet (EUV) lithography machines, used in semiconductor chip manufacturing. Lately, it has become famous for its High-NA machines. These machines, by delivering a much higher resolution, allow chipmakers to print more transistors on a single chip, effectively enhancing chip performance and making them more power efficient for AI workloads.

Ever since the company started delivering these machines, every ASML Holdings earnings call generates the same debate. How many High-NA systems did the company ship? How many orders did it receive? What does the backlog look like? The questions are justified, since all ASML does is manufacture high-end lithography machines that have no competitor in sight. But this focus takes the attention away from another part of the business, the Installed Base management (IB) revenue. This refers to the service, upgrade, and software revenue tied to the machines already deployed in the field.

ASML announced its Q2 2026 earnings report on July 15, and it contained interesting insights into its Installed Base Management business. Over 30% of the total sales came from this segment, whose high margins helped the company deliver gross margins that were higher than its provided guidance. Every ASML lithography machine sold starts this high-margin, recurring revenue stream that is now boosting the company’s financials.

The Real Moat Isn’t The Machine. It’s What Comes After

The company already does a great job of ensuring all the high-end chip producers use its lithography machines. So the customers aren’t going anywhere. But it does an even better job of ensuring that servicing them is even more profitable. That is where the company’s pricing power sits. If a chip manufacturer wants to use another vendor’s services, it cannot simply call a new helpline and get the problem fixed. It will need to build its manufacturing facility from the ground up if it ever wants to get out of the ASML ecosystem. This is what makes the IB segment so lucrative for the company.

Why ASML Is Less Cyclical Now

IB revenue also protects the company from the cyclicality of AI capex. Just three years ago, it accounted for around 20% of the total sales. It has since climbed to 28-30%, improving the company’s revenue mix and reducing reliance on machine sales. If the company is now less cyclical with improving margins, one should logically conclude that it deserves a premium valuation. 

Yet it trades at around a forward P/E multiple of 40x, just 6% above its 5-year average forward earnings multiple of 37.6x. The forward price to cash flow multiple of 38.4x is almost twice the sector median, clearly due to the company’s strong moat. However, the recurring revenue of IB doesn’t seem to be priced in, considering the 5-year average multiple is 37x. The market has hardly reacted to the shift in revenue mix.

The Revenue Isn’t Majorly Driven By New Orders

While the hardware sale depends entirely on customers’ capex cycles and AI demand, the IB segment keeps growing reliably. It is recurring, contracted, and tied to an installed base that is always in use, irrespective of any customer’s spending cycle. This smooths out cyclicality and offers a reliable revenue stream for both analysts and investors to rely on. As long as the company is shipping machines to customers, its high-margin management revenue keeps flowing.

There’s One Catch For Investors

The above, however, also brings in a risk. The IB revenue is tied to the installed base itself. At first glance, this doesn’t seem like a big deal until one realizes that the number of machines shipped acts like a mechanical constraint. The company cannot provide services for products it hasn’t shipped yet, and so the number of machines shipped acts as a leading indicator of the future IB revenue. The bookings that Wall Street is so focused on right now are what’s underwriting the future services cash flow. 

So the market has its eyes on the right thing. It just doesn’t appreciate the margin difference between the two and is therefore not following the machine sales numbers to their logical conclusion. As long as ASML keeps shipping its machines, it isn’t just doing great business. It is also feeding a high-margin, recurring revenue stream of the future that drives the company’s strong cash flows and high margins.