Chip equipment maker ASML warned of a slower than expected recovery in the semiconductor market on Tuesday, triggering panic among investors who quickly offloaded stocks across the sector.
The company’s quarterly results, accidentally published a day early, revealed orders that were half of what investors had expected. The company also cut its forecast for next year, citing “customer cautiousness” and a lagging recovery across all segments outside of artificial intelligence (AI).
ASML stock collapsed, wiping about €50bn (£42bn) from the company’s market value – one of Europe’s five largest single-day market capitalisation crashes ever.
Chief executive Christophe Fouquet warned that the rebound in demand would be “more gradual,” raising fears of a broader downturn in the chip industry.
ASML’s stock plummeted 16.3 per cent in New York and continued to slide, falling 4.3 per cent in pre-market trading on the Nasdaq and five per cent in Amsterdam.
ASML spooks investors
The company’s equipment is expensive, making it a purchase that major customers like Intel and Samsung – who are already battling their own difficulties – may be delaying amid the current market uncertainty.
Industry analyst Alex Degroote said he believes ASML is overexposed to Intel as a customer and there are weaker expectations of demand from China in general, leading to the reduced revenue expectations.
“I think the market will just extrapolate it across all chip companies,” he said, although he added it doesn’t mean AI is a “busted flush” in terms of demand for advanced semiconductors. “However, the market may use this news as a chance to take profits on names like Nvidia,” Degroote added.
It certainly spooked investors. Nvidia, which had hit a record high on Monday, fell 4.5 per cent, despite being largely unaffected by ASML’s non-AI-related issues. Others followed suit: chip manufacturer AMD slid five per cent, Broadcom dropped 3.5 per cent and chip designer Arm tumbled 6.9 per cent.
Collectively, the market value losses for the index of US-traded chipmakers and the largest Asian stocks exceeded $420bn (£323bn), according to Bloomberg.
“It was a blanket sell-off despite ASML saying AI-related demand remains strong, which suggests investors are worried that this warning is the sign of things to come on a broader basis,” said Russ Mould, investment director at AJ Bell.
Companies such as Apple have already faced challenges in smartphone sales and the electric vehicle sector is grappling with sluggish growth. Investors may have assumed that these difficulties were already reflected in ASML’s guidance and so the company’s earnings miss came as a shock, Mould explained.
Geopolitical troubles
Geopolitics has played a big part. ASML and its peers have been caught in the crosshairs of Dutch and US government restrictions on selling advanced chip-making machines to China, to curb Beijing’s ability to develop its own sophisticated AI systems.
This has stifled demand, as China has historically been one of their largest buyers. Although ASML has sold older equipment to the country, concerns are growing that China has been stockpiling machines, potentially dampening future sales.
In short, the sanctions have cut off a major market for European chipmakers, impacting their revenue and profit expectations, leading to stock sell-offs like this one.
Nvidia, too, faces its own geopolitical challenges, with US export limits on AI chips to China and speculation that the Biden administration could extend this to certain Persian Gulf countries, according to Bloomberg.
Investors are wary that these restrictions could also hit Nvidia’s future growth, overshadowing what has otherwise been a strong narrative for the company recently.
“Pre-market trading doesn’t show a big rebound in Nvidia today, which suggests investors don’t feel confident to buy on the dip and that they’re asking tougher questions about whether all chip companies are about to hit a bump in the road,” Mould added.