ASML's Dominance at a Crossroads: Can EUV Challenges and Geopolitics Derail the Chip Equipment Leader?

The semiconductor equipment sector is undergoing a seismic shift, and ASML Holding NV (ASML) finds itself at the center of the storm. Once a near-monopoly in extreme ultraviolet (EUV) lithography—a technology indispensable for advanced AI and 5nm chip manufacturing—the Dutch giant now faces headwinds from declining EUV capital expenditures (capex), geopolitical tensions, and the rise of alternative miniaturization technologies. Investors must weigh whether ASML's valuation still justifies its “Market Perform” rating or if near-term risks warrant caution, even amid long-term AI-driven demand.

Bernstein's Downgrade: A Reality Check on EUV's Diminishing Returns

Bernstein's recent analysis of ASML marks a pivotal moment for investors. The firm's initiation of coverage with a “Market Perform” rating and a €700 price target (implying 6% upside) reflects skepticism about the sustainability of ASML's EUV-driven growth. Key concerns include:
- Declining EUV Capex Intensity: Bernstein projects EUV's share of leading-edge logic capex will fall starting at the 3nm node, reducing revenue growth. By 2030, their EUV revenue forecast is 24% below ASML's internal guidance, with overall revenue growth expected to match the broader wafer fabrication equipment (WFE) market's 7% CAGR.
- Margin Pressures: Q1 2025 results showed net income of €2.4 billion but a negative €475 million free cash flow, exacerbated by tariffs and capital investments. Bernstein warns that tariffs could further squeeze gross margins in H2 2025.

The analysis underscores a critical inflection point: while EUV remains vital for AI and advanced logic chips, its marginal returns are diminishing. Competing technologies like hybrid bonding (led by BE Semiconductor's Besi) and advanced packaging are increasingly critical for performance gains, diverting investment dollars from lithography.

China's DUV Digestion: A Resilient Near-Term Tailwind, But for How Long?

China's semiconductor ambitions are both a blessing and a curse for ASML. Despite U.S. export restrictions banning advanced EUV sales, Chinese chipmakers have stockpiled older deep ultraviolet (DUV) systems to sustain production. In Q1 2025, China accounted for 27% of ASML's system sales, a figure that remains stable despite expectations of a drop to 20% for 2025.

However, this “digestion rate” of DUV systems masks deeper risks:
- Geopolitical Limits: The Netherlands' expanded export controls now restrict DUV maintenance and sales to certain Chinese facilities, potentially crimping 2025 sales.
- Domestic Alternatives: China's push to develop its own EUV technology using laser-induced plasma (LDP) could erode ASML's dominance over the long term. While ASML's CEO dismisses this as “years away,” the effort underscores Beijing's resolve to reduce reliance on foreign tech.

For now, DUV sales provide a critical buffer. Yet investors must ask: Can ASML sustain this demand if Chinese chipmakers pivot to alternatives or face further sanctions?

The AI Counterargument: EUV's Irreplaceability

Bulls on ASML argue that EUV's role in AI-driven demand remains unmatched. Advanced AI chips, such as those powering large language models, require 3nm and smaller nodes, which rely entirely on EUV. ASML's Q1 results reflected strong AI demand, with orders for its High-NA EUV systems (EXE:5200) starting in Q2 2025.

Moreover, the U.S., EU, and Japan are all investing heavily in semiconductor infrastructure, creating a long-term tailwind. ASML's backlog of €38 billion as of Q1 2025 suggests demand remains robust outside China.

Valuation and Investment Implications

ASML's shares trade at 23x forward P/E, slightly above its 5-year average of 20x. While its EUV moat is undeniable, Bernstein's concerns about slowing growth and margin pressures justify skepticism. Key questions for investors:
- Near-Term Risks: Can ASML navigate tariffs and geopolitical headwinds without sacrificing margins?
- Long-Term Sustenance: Will EUV's role in AI and automotive electrification offset declines in traditional logic nodes?

Conclusion: A “Market Perform” Rating—But with Caveats

ASML's “Market Perform” rating reflects a balancing act. While its EUV dominance and AI demand provide a moated future, near-term risks—geopolitical, margin-related, and competitive—are material. Investors should consider:
- Buy: If you believe ASML's backlog and AI demand will sustain growth above Bernstein's cautious forecasts.
- Hold: For those willing to bet on EUV's irreplaceability but wary of tariff-driven volatility.
- Sell: If you think China's DUV digestion is peaking, or alternative technologies erode EUV's relevance faster than expected.

In the end, ASML's valuation hinges on whether EUV's decline can be offset by AI's ascent—and whether the company can adapt to a world where “good enough” DUV and advanced packaging increasingly meet market needs. For now, the jury remains out.

Final Takeaway: ASML's stock may be fairly priced, but investors must monitor EUV's utilization rates, geopolitical developments, and the pace of alternative tech adoption. A “Market Perform” rating is prudent, but patience—and a long-term view—are required.