ASML's Installed Base Growth Reinforces Stability but Valuation Risks Remain Elevated

What happened

ASML's Installed Base Management business is gaining momentum in 2025, driven by system upgrades, expanding EUV adoption, and rising service revenues, as highlighted in a recent Zacks article. This aligns with the DeepValue report's observation that IBM contributes ~€2 billion quarterly, providing a recurring revenue stream to diversify from new system sales volatility. However, the report critically notes that ASML's valuation at ~44x P/E embeds a near-perfect AI upcycle, while management has only committed to 2026 sales not falling below 2025 and explicitly flagged a significant China revenue decline. The IBM acceleration may offer near-term earnings support, but it does not mitigate core risks such as potential EUV booking slowdowns, geopolitical headwinds, or delayed High-NA adoption. Therefore, while this business segment growth underscores operational resilience, it fails to address the overarching valuation concerns at current stock prices.

Implication

The Installed Base Management pickup enhances ASML's financial cushion by leveraging high-margin service revenues, which can offset volatility in new system sales during downturns. However, this strength is already priced into the stock at ~44x P/E, as the DeepValue report emphasizes, with investors overlooking management's cautious 2026 guidance and China revenue reset. Investors should remain wary because the core EUV business faces booking risks and geopolitical pressures that could trigger multiple compression if growth disappoints. Moreover, delayed High-NA ramp-up or export-control escalations could erode long-term growth assumptions, heightening downside potential. Consequently, while IBM momentum is a positive execution signal, it does not alter the recommendation to avoid the stock at elevated levels and seek better entry points below $1,000.

Thesis delta

The article on IBM growth corroborates the DeepValue report's emphasis on service revenue as a stabilizer, but it introduces no new catalysts to change the investment thesis. It reinforces the view that ASML's valuation is excessive relative to near-term risks, including China sales declines and uncertain EUV demand. Thus, the thesis remains unchanged: ASML is a 'POTENTIAL SELL' at current prices, with better risk-reward on pullbacks.