ASML’s weakness flags limits of the AI boom

Chip off. As the sole maker of the most advanced chip-making machines, ASML’s health is a bellwether of sorts for the semiconductor industry. As such, the 260 billion euro company led by Christophe Fouquet sent a sobering message on Tuesday as it lowered guidance after disappointing bookings in the third quarter. Investors assuming that a wave of artificial intelligence-fuelled chip demand will lift all boats should take note.

ASML made a rod for its own back by managing to mistakenly push out its latest results a day early. But the 15% drop in its shares on Tuesday afternoon was merited. In the third quarter, the Dutch group booked less than half the 4 to 6 billion euros of new machine orders that analysts polled by LSEG had anticipated. Fouquet also walked back ASML’s bullish 2025 sales guidance range of between 30 and 40 billion euros to the bottom half of that range. The bad vibes were heard across the sector: chipmakers and designers Advanced Micro Devices, Intel, Arm, Broadcom and Micron Technology, fell between 2.3% and 6.2% on Tuesday.

ASML’s latest problem is not because the AI gold rush is any less alluring. Instead, it’s because of a slower recovery of sales among the group’s customers that make smartphones and computers. Unfortunately for Fouquet, these two segments together made up over 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 centres that are key to power AI models, makes up only 5% of the same market.

The new downer comes at a time when ASML’s growth is already in question. One of its main customers, Intel, is in crisis and has unveiled a cost reduction plan. China has been helping Fouquet offset that by stockpiling ASML machines to counter potential stricter export controls amid an ongoing U.S. trade war. But even that boost looks temporary: ASML said it expected its percentage of sales from China to be around 20% for next year, less than half the 47% level seen in the second quarter.

Investing in semiconductor stocks has been a one-way bet. Shares in Nvidia, for instance, have risen 179% since the beginning of the year, while the Philadelphia Semiconductor Index is up 30%. But after its latest plunge ASML is now only up 16%, having previously been up 47% as recently as July.

After taking account of Tuesday’s drop, ASML trades at 33 times 2023 earnings, down from over 50 times in July. That’s still above the 25 times chip equipment rivals Lam Research and Applied Materials trade at. But given Fouquet presides over what is effectively a monopoly, that premium has been substantially chipped away.

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U.S. semiconductor stocks fell on Oct. 15 after chip equipment maker ASML cut its annual sales forecasts and a report said the Biden administration was considering capping sales of advanced artificial intelligence processors to some countries. AI chip giant Nvidia fell 4.4%, retreating from a record high hit in the previous session that had put it on the brink of dethroning Apple as the world's most valuable company. Other chip firms, including AMD, Intel, Arm, Broadcom and Micron, fell between 2.3% and 6.2%, which dragged the Philadelphia SE Semiconductor Index down nearly 4%. ASML published results ahead of schedule in an apparent error on Oct. 15, reporting weak bookings and lowering forecasts. The group indicated slower chip demand recovery outside the AI sector. "We expect our 2025 total net sales to grow to a range between 30-35 billion euros, which is the lower half of the range that we provided at our 2022 Investor Day," Chief Executive Christophe Fouquet said in a statement. The Dutch company's bookings in the third quarter were 2.6 billion euros, well below forecasts that had ranged between 4 billion euros and 6 billion euros. Trading in ASML's shares were halted several times in Amsterdam and fell 16% to 668.1 euros as of 1542 GMT on Oct. 15.