ASML Holding NV Faces Challenges Amidst Slumping Demand for Microchips

Shares of ASML Holding NV took a hit on Wednesday as the European tech giant predicted flat sales for 2024, citing a decrease in demand for microchips. The company's orders fell by a significant 71% year-on-year, causing concern among investors.

Despite these challenges, ASML remains optimistic about the future of the sector, stating that an "inflection point" is on the horizon. The impact of U.S. export controls has been downplayed, and the company forecasts "significant growth" by 2025.

ASML's third-quarter results were in line with analysts' expectations, with revenues reaching €6.67 billion ($7.04 billion). This figure was slightly lower than the forecasted €6.73 billion, according to Factset data.

Following the publication of these results, ASML's stock experienced a decline of 2.5% in the Netherlands and nearly 3% in pre-market trading on U.S. exchanges. However, shares have still managed to achieve an overall increase of approximately 11% year-to-date.

Analysts attribute ASML's stock price fall to a decrease in order intake. Orders received by the company during the third quarter were described as "very weak" by JP Morgan analysts. These orders amounted to just €2.6 billion, representing a substantial 71% drop compared to the same period in 2022.

ASML's chief financial officer, Roger Dassen, acknowledged that orders were lower than previous quarters and noted that customers had become more cautious with their spending amidst the current economic climate.

Despite these challenges, ASML saw an increase in the sale of its lithography machines, selling 106 new units worldwide during the third quarter, up from 86 units sold during the same period last year. These sales, along with other services, contributed to the company's earnings of €4.81 per share.

It is worth noting that ASML's earnings slightly surpassed analysts' expectations, with the company generating a 51.9% margin on its sales. This led to gross profits of €3.46 billion, while analysts polled by Factset had forecasted earnings of €4.64.

ASML Holding NV continues to face obstacles due to slumping demand for microchips, but remains hopeful for future growth. The company's focus on expanding its market presence and improving its product offerings will play a crucial role in its ability to overcome these challenges.

ASML Anticipates Signifcant Growth in 2025

In an optimistic outlook for the future, CEO Peter Wennink predicts that 2024 will serve as a "transition year" for ASML, while 2025 is expected to bring about a period of "significant growth," even if sales remain similar to those witnessed in 2023.

Wennink explains, "The semiconductor industry is currently navigating the bottom of the cycle, and our customers anticipate the inflection point to become visible by the end of this year."

ASML has already secured an order backlog worth €35 billion, setting the stage for strong sales growth in the coming years. Raising optimism further, CTO Dassen argues that the rise of artificial intelligence and the continuing global energy transition will contribute to the upward trajectory of the company.

Analysts from JP Morgan share positive sentiments about the wider sector. While acknowledging short-term risks, they emphasize the overall strength of ASML's business. Furthermore, they underline ASML's advantageous position as the exclusive provider of extreme ultraviolet (EUV) lithography machines globally. With the growing popularity of high-tech EUV machines, ASML is poised to benefit significantly.

Interestingly, ASML may also reap benefits from geopolitical tensions between China and the West. As rival powers seek to bolster their own semiconductor manufacturing capacity, ASML's position becomes even more advantageous.

Looking ahead, Dassen assures that the new U.S. restrictions on semiconductor manufacturing equipment exports to China will have a limited impact on revenues, affecting only a "limited number" of facilities. Moreover, ASML's recent data reveals a notable increase in system sales to China. In the third quarter, sales to China accounted for 46% of total sales, compared to 24% in the previous quarter. Dassen attributes this surge to the fulfillment of orders from 2022.

In summary, ASML anticipates significant growth in 2025, supported by strong sales, technological advantages in EUV lithography machines, and potential benefits from geopolitical shifts.