Investors and analysts are expressing skepticism about ASML, a leading computer chip equipment maker, after the company revised its financial guidance for 2025 downward, citing weakness in markets beyond artificial intelligence (AI) and delays in customer orders. As Europe’s most valuable technology company, ASML plays a critical role in supplying chipmakers with essential lithography tools needed to fabricate advanced semiconductor circuitry. However, recent developments have raised questions about its short-term sales prospects and its ability to sustain long-term growth in an evolving market.

On Tuesday, ASML’s announcement triggered the most significant drop in its share price in two decades. Following the guidance cut, shares plummeted 4.9% to €635.60 ($688.80) during early trading on Wednesday, continuing a downward trend from an all-time high of over €1,000 ($1,088) per share reached in July. This peak had followed a decade of impressive growth driven by ASML’s dominance in the lithography equipment sector, essential for chip manufacturing.

In the wake of the COVID-19 pandemic, ASML had experienced a surge in demand for its products. However, the company has reported that several customers have recently announced delays in their new plant constructions and upgrades. This includes manufacturers of logic chips, which are vital for smartphones, personal computers, and a variety of electronic devices. Similarly, memory chip manufacturers are planning fewer expansions, opting to rely on their existing equipment for extended periods.

Nick Rossolillo, an analyst with Concinnus Financial and an ASML shareholder since 2022, commented, “There need to be limits to the expectations we investors put in any single company. That’s especially the case for an upstream equipment supplier highly reliant on the spending plans of its manufacturing customers.” His statement underscores the vulnerability of ASML’s business model to the capital expenditure (capex) decisions of its clients.

While ASML did not specify which customers prompted the revised guidance, many analysts are focusing on Taiwan Semiconductor Manufacturing Company (TSMC), a significant player in the semiconductor industry that produces AI chips for Nvidia and chips for Apple devices. Michael Roeg, an analyst at Belgian investment bank Petercam Degroof, remarked, “The strong sales trends at TSMC are a misleading indicator for the overall health of the semiconductor industry.” He noted that TSMC has been operating with relatively low capex this year and may continue to do so in 2025, as the utilization rates of their plants do not align with the strong sales figures.

Further complicating ASML’s outlook, Intel announced in August that it would reduce its capital spending by $10 billion in 2025. Additionally, Samsung is grappling with challenges related to a new factory being constructed in Texas. These developments indicate that ASML’s customer base is not only shrinking its growth expectations but is also potentially impacting ASML’s bottom line.

Although ASML commands approximately a quarter of the total spending on semiconductor manufacturing equipment, analysts have raised concerns that shifts in chipmaking techniques could reduce that percentage. Han Dieperink, chief investment officer at Aureus, pointed out that customer delays might also serve as a negotiating tactic, putting pressure on ASML to concede on pricing, which could subsequently squeeze the company’s profit margins.

Despite these challenges, ASML remains a cornerstone investment for many, although Aureus has reduced its stake due to valuation concerns. Dieperink noted that orders from Chinese chipmakers have declined as U.S.-led export restrictions take effect, complicating ASML’s situation even further. “China of course knew the (restrictions) were coming, and they front-loaded purchases in the 2022-2024 period,” he explained, highlighting the proactive measures taken by Chinese manufacturers in anticipation of regulatory changes.

The combination of customer delays, shifting market dynamics, and competitive pressures suggests that ASML may face a challenging landscape ahead. While the company’s position as a key supplier to the semiconductor industry remains secure, its ability to maintain growth in the face of these obstacles is uncertain. As the semiconductor market continues to evolve, ASML will need to navigate these challenges effectively to sustain its leadership position and deliver value to its shareholders.

(Adapted from ThePrint.in)