ASML (ASML -9%) saw a significant drop today, even though the Dutch photolithography machine manufacturer exceeded sales and earnings expectations for Q2. The bearish guidance for Q3 revenue, projected below consensus, contributed to the decline. However, ASML's order book grew by 23.7% year-over-year to €5.57 billion, and the company reiterated its FY24 revenue guidance of €27.56 billion.
Why are investors reacting negatively?
Several factors are influencing investor sentiment. Reports suggest President Biden is considering additional restrictions on chip exports to China, which could impact overseas companies like ASML. The Dutch government has already imposed export controls on semiconductor equipment, and with Chinese customers accounting for over a quarter of ASML's FY23 sales, further restrictions could significantly affect future performance.
Additionally, ASML shares had surged nearly 25% since last quarter, reaching all-time highs last week. This increased the risk of profit-taking, especially after another disappointing quarterly forecast. ASML's Q3 revenue target of €6.7-7.3 billion, while indicating a return to positive year-over-year growth after two consecutive quarters of decline, fell short of analyst expectations. The company views 2024 as a transition year, adding to volatility and macroeconomic uncertainty.
- ASML achieved a similar-sized earnings beat as the previous quarter, surpassing analyst estimates by double digits in Q2. However, the transition year's effects were evident, with EPS dropping 18.7% year-over-year to €4.01. Revenue also declined for the second straight quarter, down 9.5% year-over-year to €6.24 billion.
- The market places significant weight on ASML's quarterly bookings, which jumped 54% sequentially. EUV, responsible for creating the most advanced chips, accounted for nearly half of the bookings. CEO Christophe Fouquet noted that semiconductor inventory levels improved during Q2, supporting a strong quarter-over-quarter increase in bookings.
- Fouquet also highlighted robust developments in AI, driving the industry's recovery and growth, particularly in the memory market. ASML expects memory customers to upgrade their systems in anticipation of a demand surge in 2025.
- Other growth drivers include the global energy transition and vehicle electrification. ASML is also preparing for numerous new fabs being built worldwide. The company dominates the lithography systems market, crucial for chip-making giants like Intel (INTC, Financial), Taiwan Semi (TSM, Financial), and Samsung (SSNLF, Financial), all of which are increasing capacity.
Despite today's sell-off, similar to last quarter, this drop could be temporary if excitement around AI persists. While sector rotation has caused previously favored AI stocks like ASML to fall slightly out of favor, the company remains well-positioned to capitalize on an expected ramp-up in 2025.
