The semiconductor equipment manufacturer, ASML, has dampened hopes for a swift recovery in 2025. ASML’s stock experienced a 16% decline on October 15 after its third-quarter earnings report was inadvertently released a day earlier than scheduled, revealing underwhelming results.
The Dutch company’s net sales increased by 20% year over year to €7.47 billion ($8.14 billion), falling short of analysts’ projections by €430 million. Additionally, net bookings rose by only 1% to €2.63 billion ($2.86 billion), missing the consensus forecast by a substantial €2.73 billion. The gross margin of ASML also decreased by 110 basis points year over year to 50.8%. Earnings increased by 10% to €5.28 ($5.75) per share, albeit missing analysts’ expectations by €0.28.
ASML’s outlook for the near term was equally concerning. The company anticipates revenue growth of between 22% and 28% year over year in the fourth quarter, with only a 1% rise to approximately €28 billion ($30.5 billion) for the full year, marking the slowest growth rate for a full year in nine years. Looking at 2025, ASML expects revenue growth between 7% and 25%, falling short of its previous projection of up to 43% growth.
ASML specializes in photolithography systems, which are crucial for etching circuit patterns onto silicon wafers. The company is the global leader in deep ultraviolet (DUV) lithography systems and the sole supplier of extreme ultraviolet (EUV) systems necessary for producing advanced chips. An EUV system is priced around $180 million and requires multiple planes for transportation. Prominent chip foundries such as TSMC, Samsung, and Intel utilize these machines for high-end chip production. ASML’s latest “high-NA” EUV systems, designed for even smaller chip traces, cost approximately $380 million.
ASML is considered a pivotal player and indicator of the semiconductor market. However, its growth remains cyclical and is linked to the upgrade cycles of major chipmakers. Export restrictions have hindered the shipment of high-end DUV and EUV systems to mainland China, which accounted for 26% of ASML’s net sales in 2023.
Between 2020 and 2023, ASML experienced double-digit annual revenue growth and expanding gross margins. This growth was driven by increased sales of PCs during the pandemic, new 5G smartphones, and rising demand for AI chips. However, for 2024, ASML expects stalled revenue due to tighter export curbs affecting Chinese chipmakers, the AI market’s initial growth spurt waning, and the transition to high-NA EUV systems.
In 2025, a stronger recovery was anticipated, contingent on overcoming these challenges and increasing high-NA EUV shipments. Yet, TSMC has only recently ordered its first high-NA EUV systems and is not hastening to replace existing low-NA EUV systems. Intel is contemplating a spin-off or sale of its entire foundry unit, potentially disrupting its orders from ASML. Samsung is projected to install its first high-NA EUV systems by late 2024. The rapid expansion of the AI market is motivating chipmakers to integrate AI features into existing chips, possibly delaying the adoption of high-NA EUV systems.
As top customers adopt conservative high-NA EUV strategies, EU regulations prevent ASML from shipping higher-end systems to China, excluding it from a significant market needing its systems.
Currently, ASML stock is valued at $730 per share, equivalent to 27 times forward earnings. However, the stock may remain pressured until ASML overcomes its immediate challenges and its bookings growth picks up. Existing ASML shareholders are advised to hold their positions through this cyclical downturn. Prospective investors may find it prudent to wait as ASML’s top customers delay high-NA EUV purchases and the chip market faces potential cooling. Balanced chip investments like TSMC are suggested alternatives to ASML at this time.
