Semi Sector Tumbled as ASML Saw Largest Drop in 26 Years on Gloomy Outlook, but Does Not Mean AI

Just as Nvidia hit a new closing high on Monday, lifting the semiconductor sector, the situation quickly turned around. On Tuesday, U.S. chip giants experienced a significant sell-off, with ASML tumbling 16%, marking its worst single-day performance since 1998. Applied Materials fell over 10%, Nvidia dropped more than 4%, and AMD declined over 5%. Moreover, the panic among chip stocks spread to the tech sector, with the Nasdaq closing down 1%.

What happened? The lithography giant ASML was supposed to release its third-quarter earnings on Wednesday, but due to a technical glitch, the information leaked during mid-market hours. Despite revenue and earnings exceeding expectations, the net bookings were less than half of what was anticipated, and the company also lowered next year's guidance, shocking AI bulls.

Specifically, ASML reported third-quarter sales of €7.5 billion, a 20% quarter-over-quarter increase; net profit was around €2.1 billion, up 32% quarter-over-quarter; and gross margin was 50.8%. However, the net bookings were only €2.63 billion, a 53% quarter-over-quarter decline, significantly missing the expected €5.39 billion. The company also lowered its sales forecast for next year to between €30 billion and €35 billion, down from the expected €35.94 billion; the gross margin is projected to be between 51% and 53%, also below the expected 54%-56%.

"While there continue to be strong developments and upside potential in AI, other market segments are taking longer to recover. It now appears that the recovery is more gradual than previously expected," CEO Christophe Fouquet said in the earnings release.

China has always been ASML's largest market, but ongoing export restrictions are hurting the outlook. The Chinese market accounted for 47% of its lithography system sales in Q3, down from 49% in the previous quarter. However, CFO Roger Dassen projected that China would contribute about 20% of total revenue next year, aligning with the current backlog. Under the layers of restrictions from the U.S., the company is forced to lose key orders.

ASML's Outlook is Bleak but Does Not Reflect AI

Analysts at Bernstein stated that the weaker-than-expected order book and a disappointing outlook for 2025 were "likely to overshadow decent Q3 results." They added that the lowered guidance indicates that "the delayed cyclical recovery and specific customer challenges are weighing heavily" on expectations for 2025.

Cantor analysts believe that ASML's pessimistic guidance is clearly disappointing and will pressure semiconductor stocks, but in no way does the company's updated outlook indicate any change in the AI growth story.

It is worth noting that ASML's disastrous earnings report does not accurately reflect the AI narrative. This has happened in the past; although lithography machine sales fell short of expectations, semiconductor end products were selling like hotcakes. TSMC will release its earnings report on Thursday, which will better reflect global consumer electronics and AI server sales, making it another focal point for the market.