ASML earnings catch market off guard; China exposure and slow non-AI recovery impact results

ASML’s Q3 2024 earnings were released unexpectedly a day early, surprising the market. The company reported EPS of EUR 5.28, missing the consensus of EUR 5.36, while revenue rose 11.9% year-over-year to EUR 7.47 billion, but also fell short of the EUR 7.87 billion consensus. Despite some positive aspects in the results, lower-than-expected bookings and cautious guidance for 2025 weighed heavily on investor sentiment, leading to a 16% drop in the stock price.

ASML provided downside guidance for Q4, with expected revenues between EUR 8.8 billion and EUR 9.2 billion, below the consensus of EUR 9.8 billion. The company also reduced its full-year 2025 revenue outlook to a range of EUR 30 billion to EUR 35 billion, significantly below prior forecasts of EUR 39.37 billion, as a gradual recovery in non-AI semiconductor markets is taking longer than expected. These revisions raised concerns over slower demand in key segments, particularly EUV lithography systems.

ASML is the world’s leading supplier of semiconductor manufacturing equipment, specializing in extreme ultraviolet (EUV) lithography machines that are critical to producing advanced chips. Its importance to the global semiconductor supply chain cannot be overstated, with major clients such as Taiwan Semiconductor Manufacturing Company (TSMC), Intel, and Samsung Electronics relying on its technology to produce next-generation chips, particularly for AI and other advanced applications.

The company’s Q3 bookings came in at EUR 2.6 billion, well below the EUR 5.6 billion expected by analysts. ASML CEO Christophe Fouquet attributed the slowdown to customer cautiousness in non-AI market segments, such as logic and memory, where capacity additions have been limited and new node ramp-ups have been delayed. These delays impacted lithography demand, particularly for EUV systems, which are crucial for advanced chip manufacturing.

ASML's China exposure continues to be a significant factor, as the company’s CFO Roger Dassen noted that China is expected to account for around 20% of ASML's revenue in 2025, down from 49% in previous periods. The geopolitical environment and export restrictions have reduced sales to China, impacting overall demand. Despite these challenges, the company expects China’s contribution to revenue to normalize in the coming year, but this represents a decline from historically high levels.

Despite the weaker bookings, ASML’s third-quarter gross margin was 50.8%, within the company’s guidance range, supported by higher sales of its DUV (deep ultraviolet) lithography systems and services through its Installed Base Management segment. However, with gross margins projected to remain under pressure, the company now expects margins between 51% and 53% in 2025, below its previous target range.

ASML continues to benefit from the strong demand for AI-related chips, driven by the rise of artificial intelligence and high-bandwidth memory (HBM). However, slower recovery in other segments is leading to cautious customer behavior, which is reflected in the company's more conservative outlook. This dynamic is not only affecting ASML but is also pulling down other semiconductor stocks like Nvidia, AMD, and Broadcom.

In summary, ASML's Q3 earnings revealed strong demand in AI-related markets, but slower recovery in logic and memory segments caused a significant cut to future guidance. The company remains crucial to the semiconductor supply chain with key clients like TSMC and Intel, but geopolitical factors and reduced China exposure are challenges it continues to navigate.