ASML (ASML) a disappointing earnings report on Tuesday fueled a selloff in chip stocks that sent Nvidia (NVDA) and others in the industry, but industry analysts told Yahoo Finance that doesn’t mean demand for AI chips is weakening more broadly.
ASML — previously the most valuable technology company in Europe before stocks began to plunge this week — is the main maker of machines used by TSMC (TSM) to create Nvidia’s (NVDA) chips. The Dutch company’s quarterly financial report, released a day early on Tuesday, apparently by mistake, contributed to a massive drop in chip stocks. The PHLX Semiconductor Index (^SOX) fell more than 5% following the report, well underperforming the S&P 500 (^GSPC), down 0.7% on Tuesday.
Meanwhile, Nvidia fell 4.5%. Its rival Advanced Micro Devices (AMD) fell 5.2%, and chipmaker Broadcom (AVGO) fell 3.5%. Chip stocks began to recover on Wednesday, with Nvidia up 3%, AVGO up 0.5% and AMD down a modest 0.3%. ASML itself fell 16% on Tuesday and another 6.4% on Wednesday.
ASML’s earnings release showed the company booked orders worth less than half the value predicted by Wall Street analysts tracked by Bloomberg. Order reservations are a measure of future demand for ASML machines. Although ASML’s earnings per share of €5.28 ($5.80) and revenue of €7.5 billion ($8.2 billion) beat analysts’ forecasts for the quarter, its reservations totaled only 2.6 billion euros ($2.8 billion)against the expected 5.39 billion euros, according to Bloomberg consensus data.
ASML’s outlook for next year was not as sunny as its previous forecasts. ASML lowered the upper range of its 2025 sales forecast, forecasting sales of between €30 billion ($32.6 billion) and €35 billion ($38 billion), as its previous upper estimate amounted to 40 billion euros ($43.5 billion). The company also lowered its earnings outlook, forecasting a gross margin of 51% to 53%, compared to a prior outlook of 54% to 56%.
Wall Street analysts said in separate notes to investors this week that demand for AI chips remained strong, despite the rout of AI semiconductor stocks accelerated by ASML’s report.
“If there’s a bright spot in the report, it’s probably the demand for AI,” Bernstein analyst Stacy Rasgon said in a note Tuesday. He said the sell-off in shares of Nvidia, AMD and Broadcom on Tuesday was “potentially overdone.”
Meanwhile, Mizuho analyst Kevin Wang wrote in a note Wednesday that he forecasts a “continued rise in AI” through 2025 and 2026.
A “sectoral divergence”
Bank of America analysts said ASML’s earnings “indicate an industry divergence between strong AI demand and weak non-AI demand.”
Despite Big Tech spending heavily on AI infrastructure and the resulting boom in AI chip maker valuations, demand for AI still represents a relatively small share of AI chip maker sales. semiconductors, according to Thibault Leneeuw, analyst at KBC Securities. In other words, ASML’s underperformance says more about the traditional semiconductor business — chips currently used in smartphones, computers, utilities, cars, and more. – than on the demand for AI.
Leneeuw told Yahoo Finance that Nvidia and AMD account for about 7% of the chip manufacturing industry’s sales.
“So AI can perform well and we expect it to continue to perform well,” he said, “but the other 93% of semiconductor demand (smartphones, high-performance computing, automotive, industrial products, etc.) are low and this is an important distinction. .”
ASML CEO Christophe Fouquet said Wednesday morning during an investor call: “While we continue to view Al as a key driver of the industry’s recovery with upside potential, we see other segments recover more slowly than expected. »
The AI chip market is expected to grow 99% in 2024 and another 74% next year. Meanwhile, the overall semiconductor market is expected to grow 18% this year and 12% in 2025, according to consultancy International Business Strategies, which tracks industry data. IBS data shows that the AI chip market – also known as the accelerator chip market – will outpace the industry as a whole through 2030.
In addition, Intel’s recent difficulties and reduced capital spending played a role in lowering ASML’s guidance, Bank of America analysts said. Intel (INTC), TSMC and Samsung (005930.KS) are ASML’s main customers and account for the lion’s share of revenue. Intel does not make Nvidia or AMD chips.
Trade tensions with China are taking their toll
To be sure, ASML’s darker outlook was largely due to the company’s view that Chinese corporate spending — which has surged over the past two years — will return to “a more normalized percentage of our business » in 2025. Chinese demand is a factor. this could affect other players in the chip sector.
Chinese companies accounted for a much higher than usual share of ASML’s revenue in 2023 and 2024, with China accounting for 45% to 50% of ASML’s revenue this year, according to analysts. ASML Chief Financial Officer Roger Dassen said on a call with investors on Wednesday that China will likely contribute nearly 20% of the company’s sales next year as the company takes a more cautious outlook on sales in China due to the company’s speculation about new export controls.
Bank of America said there was “a high likelihood that China has made equipment purchases over the past two years in the run-up to elections and renewed geopolitical tensions.”
The Dutch government last month tightened export restrictions by expanding licensing requirements for certain ASML machines – an attempt to further limit China’s access to this technology. Under pressure from the United Statesthe Netherlands have never allowed ASML to deliver its most advanced EUV machines – needed to manufacture advanced semiconductors – to Chinese chipmakers. ASML machines rely heavily on American-made components.
Argus Research analyst Jim Kelleher sees ASML’s reduced reliance on China as an overall positive, despite the short-term impact on sales. “China is politically unstable and could face increasingly severe restrictions at any time; both U.S. political parties have threatened additional restrictions if they win the White House,” he said. “So we see it as very positive for ASML to reduce China’s revenue contribution.”
Laura Bratton is a reporter for Yahoo Finance. Follow her on X @LauraBratton5.
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