To The Moon

Last night, $ASML Holding NV(ASML)$ suffered a severe blow, with its stock plunging 16%, marking its biggest one-day drop in 26 years.

In a time when companies like $Broadcom(AVGO)$ and $Taiwan Semiconductor Manufacturing(TSM)$ are hitting all-time highs, how did the dominant lithography machine maker like ASML come crashing down?

1.Earnings Shock

This downturn is tied to ASML’s unexpected Q3 earnings report. The company reported new orders of just €2.63 billion, far below analysts’ expectations of €5.39 billion. They also lowered their 2025 revenue guidance from €30 billion-€40 billion to €30 billion - €35 billion and adjusted gross margin expectations down from 54-56% to 51-53%.

Management warned that, apart from AI, recovery in other chip demands isn’t meeting expectations.

Investors were spooked, not just by ASML's drop but also by the ripple effect on other equipment makers. Companies like $Applied Materials(AMAT)$ and $Lam Research(LRCX)$ fell 11%, while $KLA-Tencor(KLAC)$ dropped 15%. Major players like $Advanced Micro Devices(AMD)$ $NVIDIA Corp(NVDA)$ $Taiwan Semiconductor Manufacturing(TSM)$ also saw their stocks decline.

2.Looking Ahead for ASML

While ASML faced a short-term setback, its long-term outlook remains positive. The company reported a solid €7.5 billion in revenue for the third quarter, up 12% year-on-year and exceeding guidance.

The gross margin was 50.8%, also at the upper end of management's guidance range of 50%-51%, exceeding analyst expectations of 50.7% :

For Q4, ASML expects revenue between €8.8 billion - €9.2 billion, marking a 24% increase year-on-year, which is above analysts’ predictions. Even at the lower end, this would set a new quarterly revenue record.

Despite a minor dip in Q4 gross margin expectations, ASML’s growth trajectory is still strong. The 2025 revenue cut is partly due to outdated previous forecasts and Intel’s recent struggles affecting its wafer fab construction, which impacts ASML's shipping pace.

It’s worth noting that demand in traditional sectors like automotive and industrial chips has not rebounded as quickly as hoped, casting a shadow on 2025 projections.

ASML's steep decline primarily stems from disappointing 2025 performance forecasts. While the quarterly order fluctuations are typical, they don’t convey much meaning.

3.Valuation Perspective

Despite the drop, ASML’s price-to-earnings ratio has fallen to 38, one of its lowest in years. Based on the mid-point of the 2025 revenue guidance, ASML could see a growth rate of 16%. If gross margins improve, net profit growth may be even higher, potentially lowering the PE ratio to around 30, reflecting a bottoming out.

ASML will update its financial guidance on November 14, which may prompt investors to reassess its future prospects.

4.Impact on Other Semi Companies

ASML's management noted strong demand for AI, which should have minimal impact on companies like Nvidia, TSMC, and Broadcom. For automotive and industrial chipmakers like $ON Semiconductor(ON)$ and $Texas Instruments(TXN)$ , ASML's warning isn't particularly alarming, as they have already faced challenges.

Tracking their earnings reports shows these issues have been evident for some time, with customers still depleting inventories and new demand remaining weak. ON Semiconductor and Texas Instruments saw stock drops of 5% and 4%, respectively, mirroring the broader market reaction and indicating that investors were not taken by surprise.

However, for other semiconductor equipment manufacturers like Applied Materials and Lam Research, the impact of delays in advanced wafer fab construction could significantly affect their performance in the near term.

Overall, while ASML’s drop was dramatic, its long-term prospects and the broader semiconductor landscape suggest a more nuanced story ahead.