As almost every investor knows by now, artificial intelligence (AI) has been driving the current bull market since its start in 2023.Simla Investment
The launch of OpenAI's ChatGPT has set off a new arms race in the industry, and generative AI technology could be as transformative as the internet. While stocks with exposure to artificial intelligence, like the semiconductor sector, have generally done well, some stocks have done better than others.
Nvidia, for example, just set another all-time high on soaring demand for its new Blackwell platform, but not every AI stock has kept up with the Nasdaq Composite, which nearly set an all-time high earlier this week. In fact, ASML is now down 34% from its peak earlier this year after the industry bellwether gave a disappointing forecast in its third-quarter earnings report on Tuesday. The stock fell 16.3% on the news.
ASML occupies a unique position in the semiconductor industry as the only maker of extreme ultraviolet (EUV) lithography machines, which are used to make the most advanced, smallest-node chips.
Investors have been looking forward to a recovery in ASML's business after an earlier slowdown due to macrochallenges like high interest rates and inflation.
ASML is expected to benefit from the expansion of chip fabs around the world as governments and industries prepare for the AI era. The U.S., for example, is planning to invest tens of billions of dollars through the CHIPS Act to build foundries, and Taiwan Semiconductor, the world's biggest foundry operator, is looking to diversify away from Taiwan and move closer to its customers.
While that should be a tailwind for ASML, the company just told customers that recovery would take longer than expected. Citing weakness in both the logic and memory segments, which make up two of its three business segments, CEO Christophe Fouquet said, "It now appears the recovery is more gradual than previously expected." He also noted customer cautiousness.
ASML dialed back the 2025 revenue forecast it gave at its 2022 Investor Day from 30 billion euros to 40 billion euros ($33 billion dollars to $43 billion dollars) to 30 billion euros to 35 billion euros ($33 billion dollars to $38 billion dollars)New Delhi Investment. Not surprisingly, investors were disappointed with the news.
Companies tend to give disappointing earnings reports and forecasts for one of two reasons: Either there are challenging market conditions at the macrolevel or sector level, or the company itself isn't executing well and is falling behind the competition.
ASML's case looks to be safely in the first categoryKanpur Investment. While there's plenty of excitement about AI, which management nodded to, there are still some challenges in the legacy-chip business, reflected in key customers like Intel and Samsung, both of which are struggling.
Samsung is reportedly delaying mass production at a fab in Texas due to weak yields in its 3-nanometer process, and Intel just announced a massive restructuring, calling into question its foundry expansion. In recent quarters, half of ASML company's revenue has also come from China, where the economy has been weak since the end of the pandemic.
For comparison, a good recent example of a company that struggled with similar headwinds was Alphabet as digital advertising slowed in 2022 on fears of a recession, as you can see from the chart below.Lucknow Investment
As you can see, revenue growth dropped to just 1% in 2022's Q4, but if you had bought the stock then, you'd be up more than 80% now.
ASML retains a significant competitive advantage as the only producer of EUV lithography machines, and it should eventually benefit from the coming boom in chip production due to AI.
Even with its dialed-down guidance, the company is still calling for 16.1% growth at the midpoint and expects expanding gross margins and operating margins.Mumbai Stock Exchange
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