The semiconductor equipment manufacturer, ASML, indicated that a swift recovery in 2025 might not be forthcoming. On October 15, ASML’s stock dropped by 16% after the company inadvertently released its third-quarter earnings report a day early, with results that did not meet expectations.
The Dutch company saw its net sales increase by 20% year over year to 7.47 billion euros ($8.14 billion), which was 430 million euros below analysts’ projections. Additionally, net bookings rose by only 1% to 2.63 billion euros ($2.86 billion), missing the consensus forecast by 2.73 billion euros.
ASML’s gross margin declined by 110 basis points from the previous year to 50.8%. Earnings increased by 10% to 5.28 euros ($5.75) per share but were 0.28 euros below analysts’ expectations.
ASML provided a less optimistic near-term forecast, anticipating revenue growth of 22% to 28% for the fourth quarter year over year, but only about 1% for the full year to reach 28 billion euros ($30.5 billion), marking its slowest annual growth in nine years. For 2025, revenue growth is expected to be between 7% and 25%, a downgrade from the previously anticipated 43% growth.
ASML’s photolithography systems, which are used to etch circuit patterns onto silicon wafers, position it as the leading producer of deep ultraviolet (DUV) lithography systems for older chip production and the sole supplier of extreme ultraviolet (EUV) systems for the smallest and most advanced chips. A single EUV system costs about $180 million and requires multiple planes for shipping. Leading chip producers like TSMC, Samsung, and Intel rely on these machines for high-end chips. The new high-NA EUV systems, which produce even smaller chip traces, cost approximately $380 million.
ASML is viewed as a crucial indicator of the semiconductor market due to its cyclical growth tied to chipmakers’ upgrade cycles. The company faces tighter export restrictions, hindering shipments of its high-end DUV and EUV systems to China, which comprised 26% of its net sales in 2023.
From 2020 to 2023, ASML experienced double-digit annual revenue growth with expanding gross margins, fueled by increased PC sales during the pandemic, the rollout of 5G smartphones, and rising demand for AI chips.
However, in 2024, ASML expects its revenue to stall as it contends with tighter export controls on Chinese chipmakers, the initial growth of the AI market, and the transition to high-NA EUV systems.
Despite expectations of a stronger recovery in 2025, high-NA EUV orders have been sluggish. TSMC recently ordered its first high-NA EUV systems but is not rushing to transition from its existing low-NA EUV systems. Intel, after installing its first high-NA EUV systems, is considering a spin-off or sale of its entire foundry unit, potentially affecting its orders from ASML. Samsung is anticipated to install its first high-NA EUV systems by the end of 2024.
The rapid growth of AI is leading chipmakers to focus on enhancing existing chips with AI features rather than developing smaller chips, potentially slowing the adoption of high-NA EUV systems. As major customers adopt conservative high-NA EUV strategies, EU regulators prevent ASML from supplying China with its high-end systems, cutting off a significant market.
At $730 per share, ASML appears reasonably priced at 27 times forward earnings. However, it may remain under strain until it overcomes current challenges and resumes booking growth. Current ASML shareholders might do well to hold their positions and endure the cyclical downturn, rather than sell. Potential investors might refrain from buying as high-NA EUV purchases are delayed, the chip market stabilizes, and tighter trade restrictions are anticipated in China, perhaps making companies like TSMC a more balanced investment.