ASML shares plunge as geopolitics overshadow strong earnings

Europe’s largest tech firm, ASML, reported second-quarter earnings that surpassed market expectations. However, the Netherlands-based company was hit by stricter US chip export restrictions on China just before its earnings release. As a result, its shares plunged 11% to €871 per share on Wednesday, marking the sharpest one-day drop since March 2020 and wiping out €42.7 billion of its market value.

Robust growth, with China contributing half of the sales

Following a growth slump in the first quarter, the Dutch semiconductor machinery manufacturer ASML reported net bookings of €5.6 billion in the second quarter, up 24% from a year ago. This key metric for ASML’s performance significantly exceeded the estimated €5.04 billion, reflecting a 12% year-on-year growth. Meanwhile, its net sales reached €6.24 billion, down 9.5% from the same quarter last year but surpassing analysts’ expectations of €6.08 billion, or a decline of 12%. Net profit was recorded at €1.58 billion, with a gross margin of 51.5%, beating the expected 50.6%.

CEO Christophe Fouquet, who replaced the former CEO Peter Wennink, maintained the outlook of a “transition” year in 2024 and expects the semiconductor industry to continue recovering in the second half. He stated: “We currently see strong developments in AI, driving most of the industry recovery and growth, ahead of other market segments…The industry expects to be in a cyclical upturn in 2025. As a result, we need to prepare for a number of new fabs that are being built today across the globe.”

ASM’’s major customers are well-known chipmakers, including TSMC, Intel, and Samsung. TSMC is a Taiwan-based chip manufacturer that supplies advanced computer chips to tech giants like Apple and Nvidia. The firm specialises in manufacturing lithography systems, complex equipment that helps make circuitry of AI-related chips. Sales to Taiwan increased by €290 in the second quarter.

Despite a strong earnings result, ASML provided weaker-than-expected forecasts for the current quarter, expecting net sales of between €6.7 billion and €7.3 billion, lower than the estimated €7.6 billion. The more restrictive China export curbs by the US might affect its outlook, as China accounted for 49% of its total sales in the first half of the year, up from a 39% market share in the final quarter of 2023.

US to impose tougher restrictions on China chip exports

Sales in China may be affected by US export restrictions aimed at curbing China’s ability to advance technology for military use, or so-called “national security” concerns. According to Bloomberg’s report, the Biden administration is considering a more restrictive trade policy on companies such as ASML, which have continued to supply China with older generations of computer chips used for cars and appliances.

The US may impose direct controls on foreign-made products using even minimal American technology. Previous export curbs on China did not stop semiconductor machinery firms from selling their lower range of products to the country. ASML’s sales to China rose by 21% in the second quarter from the previous quarter, even though its cutting-edge technology, Extreme Ultraviolet (EUV), did not receive any orders from the country.

Semiconductor led a selloff in tech shares across the globe

The slump in ASML shares also followed the global trend, as the semiconductor sector experienced a broad selloff, with Nvidia slumping 6.7%, AMD plunging 10.2%, Applied Materials sliding 10.5% on Wall Street, and the Japanese rival, Tokyo Electron shedding 7.5%, while British firm Arm’s shares were down 5%.

The tech selloff was also partially caused by profit-taking in blue chips as small-caps saw a surge this week amid growing bets for the US Federal Reserve to commence an imminent rate cut in September. The European Central Bank’s rate decision on Friday will be critical for the European markets, as the bank is expected to keep the interest rate unchanged this time. The Euro Stoxx 600 fell 0.43% as the tech sector was down 4.4%, dragged by the global trend on Wednesday.