ASML weakness signals limits to AI boom

Remove the chip. As the sole manufacturer of the most advanced chip-making machines, ASML’s health is something of an indicator for the semiconductor industry. That’s why the €260 billion company led by Christophe Fouquet sent a sobering message on Tuesday by lowering its guidance after disappointing bookings in the third quarter. Investors who assume that a wave of AI-driven chip demand will lift all boats should take note.

ASML hurt itself by mistakenly managing to publish its latest results a day early. But the 15% drop in its shares on Tuesday afternoon was deserved. In the third quarter, the Dutch group booked less than half of the €4 billion to €6 billion of new machine orders that analysts surveyed by LSEG had forecast. Fouquet also backed away ASML’s bullish 2025 sales range from between €30 billion and €40 billion to the lower half of that range. The bad vibes were heard across the sector, with chip makers and designers Advanced Micro Devices, Intel, Arm, Broadcom and Micron Technology all falling between 2.3% and 6.2% on Tuesday.

ASML’s latest problem isn’t because the AI ​​gold rush is any less attractive. Rather, it is due to a slower recovery in sales among the group’s customers that make smartphones and computers. Unfortunately for Fouquet, these two segments together accounted for more than 40% of the $500 billion chip equipment market in 2023, according to Bernstein data. Meanwhile, AI stock darling Nvidia, which designs chips often used in data centers that are key to powering AI models, represents just 5% of the same market.

The new disappointment comes at a time when ASML’s growth is already in question. One of its main clients, Intel, is in crisis and has sleepless a cost reduction plan. China has been helping Fouquet offset that by stockpiling ASML machines to counter potential tighter export controls amid an ongoing trade war with the United States. But even that boost seems temporary: ASML said so expected Its share of sales from China will be around 20% next year, less than half the 47% level seen in the second quarter.

Investing in semiconductor stocks has been a one-way bet. Nvidia shares, for example, are up 179% since the beginning of the year, while the Philadelphia Semiconductor Index is up 30%. But after its latest drop, ASML is now only up 16%, after being up 47% in July.

After accounting for Tuesday’s decline, ASML trades at 33 times 2023 earnings, up from more than 50 times in July. That’s still above the 25 times trading at chip equipment rivals Lam Research and Applied Materials. But since Fouquet presides over what is effectively a monopoly, that premium has been reduced substantially.

Context news

US semiconductor stocks fell on October 15 after chip equipment maker ASML cut its annual sales forecast and a report said the Biden administration was considering limiting sales of advanced artificial intelligence processors to some countries. The artificial intelligence chip giant, Nvidia, fell 4.4%, moving away from a record reached in the previous session that had put it on the verge of dethroning. Apple as the most valuable company in the world. Other chip companies, including AMD, Intel, Arm, Broadcom and Micron, fell between 2.3% and 6.2%, dragging Philadelphia’s SE Semiconductor Index down nearly 4%. ASML released results ahead of schedule in an apparent error on Oct. 15, reporting weak bookings and lowering forecasts. The group indicated a slower recovery in chip demand outside the AI ​​sector. “We expect our total net sales in 2025 to grow to a range of between €30 billion and €35 ​​billion, which is the lower half of the range we provided at our 2022 Investor Day,” CEO Christophe Fouquet said in a statement. The Dutch company’s reserves in the third quarter amounted to 2.6 billion euros, well below forecasts that ranged between 4,000 and 6,000 million euros. Trading in ASML shares was suspended several times in Amsterdam and fell 16% to €668.1 at 1542 GMT on October 15.

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