ASML's 2026 Crossroads: Tariffs and Geopolitics vs. the Inelastic Demand for EUV Dominance

ASML Holding (ASML) reported stellar Q2 results, with €7.7 billion in sales and a 53.7% gross margin—the latter boosted by its lucrative installed base business. Yet, the company's cautious 2026 guidance—refusing to confirm growth due to U.S.-EU tariff uncertainties—has left investors scrambling to parse the disconnect. This article argues that while near-term risks are real, ASML's monopolistic control of extreme ultraviolet (EUV) lithography technology ensures long-term structural demand will dominate. Hold this stock through the volatility.

The Near-Term Storm: Tariffs and Trade Uncertainties

ASML's Q2 performance was a masterclass in execution. EUV systems sales hit €2.3 billion, and the backlog remains robust at €25 billion. However, management's refusal to confirm 2026 growth reflects fears of a 30% U.S. tariff on European imports—a looming threat as U.S.-EU trade talks drag on.

The risks are twofold:
1. Direct Costs: A 30% tariff on ASML's €250 million EUV machines would force price hikes to €325 million, potentially deterring buyers like Intel or Samsung.
2. Indirect Risks: Retaliatory tariffs from China or other regions could disrupt ASML's global supply chain, particularly its U.S. manufacturing hub in San Diego.

To mitigate this, ASML is pursuing a three-pronged strategy:
- Cost Sharing: Passing tariff costs to customers (e.g., price hikes on U.S. sales).
- Lobbying: Leveraging its role as the sole EUV supplier to push for exemptions.
- Supply Chain Diversification: Exploring localized production in key markets.

China's Role: A Double-Edged Sword

China contributed ~25% of ASML's revenue in 2024, but U.S. export restrictions have forced it to rely on older lithography systems. While this limits ASML's upside, it hasn't stopped Chinese firms like SMIC from buying non-EUV tools. The irony? China's semiconductor ambitions remain tethered to ASML's technology, even as it invests heavily in domestic alternatives like Shanghai Microelectronics (SMEE).

The takeaway: China's demand is bifurcated. Advanced nodes are off-limits without EUV, but mature-node investments (e.g., for AI chips) keep ASML relevant.

The Long-Term Anchor: AI and EUV's Inelastic Demand

The real story is AI's insatiable appetite for advanced chips. Foundries like TSMC and Samsung are racing to build 3nm and 2nm fabs, which require EUV at every step of the manufacturing process. This is not a cyclical demand spike—it's structural.

ASML's EUV technology is the only game in town. Competitors like Nikon and Canon are decades behind, and China's SMEE won't close the gap before 2030. Meanwhile, AI-driven demand is already driving orders: ASML's Q2 EUV shipments hit 42 units, up from 36 in Q1.

Investment Thesis: Hold Through the Tariff Clouds

The disconnect between Q2's strength and 2026 caution is understandable. Tariffs and trade wars are unpredictable, and ASML's valuation (a 20% discount to its five-year average) reflects this uncertainty. But here's why investors shouldn't panic:

1. Monopoly Power: EUV is a “moat of 10,000 feet.” No alternative exists for leading-edge chips.
2. Backlog Stability: The €25 billion order book includes multi-year contracts, insulating revenue through 2026.
3. AI's Unstoppable Momentum: TSMC's $40 billion 3nm fab expansion in Taiwan isn't going away because of tariffs.

The risks are real, but they're priced in. A 30% tariff would hurt, but ASML's customers have no choice but to absorb the costs. Meanwhile, the dividend yield (~1.5%) and buybacks (€1.4 billion in Q2 alone) offer downside protection.

Final Take: A Buy for the Next Decade

ASML's near-term path is bumpy, but its long-term position is unassailable. The stock trades at 20x forward earnings—cheap for a company with 20% annual growth potential in a $100 billion lithography market.

Investors should view dips as buying opportunities. When the tariff dust settles, ASML's EUV dominance will once again drive growth. Hold for the long haul.