ASML Plunges 16%: How Should Semiconductor Investors Interpret This?

According to Bloomberg, ASML, the Netherlands-based world’s largest semiconductor equipment maker, accidentally released its third-quarter earnings—originally scheduled for the following day—early in the morning of the 15th Korea time. The company said the results were published ahead of schedule due to a technical issue.

The problem lay in the announcement itself: firm orders booked in the third quarter came in at €2.6 billion, far below analysts’ expectations of €5.8 billion. This was particularly jarring given that, just hours before the release, an equity analyst at Jefferies, a leading U.S. boutique investment bank, had published a bullish report on ASML’s order backlog. New bookings coming in at less than 50% of expectations have raised doubts about the broader recovery of the semiconductor industry, and the stock plunged 16%, its steepest drop in 26 years. Nvidia (NVDA) and Micron (MU) also fell about 4% and 3%, respectively, as the semiconductor sector as a whole pulled back.

Speculation is already swirling—“It must be because of the China export ban,” and so on—but I would argue that the slowdown in earnings at semiconductor equipment makers such as ASML and Applied Materials (AMAT) was entirely predictable, and does not represent a problem for the semiconductor sector as a whole. The answer becomes clear once you look at the CAPEX (capital expenditure) plans of their key customers: TSMC, Samsung Electronics, and Intel.

Excluding TSMC, currently the world’s No. 1 foundry, industry giants Samsung Electronics and Intel are struggling with low utilization rates in their foundry businesses due to their failure to secure customers and yield issues. As a result, they are postponing previously planned new fabs. Considering that close to 90% of semiconductor fab construction costs are equipment investments, this directly translates into revenue uncertainty for equipment makers.

Despite the onset of the semiconductor downturn in 2022, continued fab expansion by Samsung Electronics, Intel, and Chinese semiconductor companies allowed equipment makers to keep posting strong results. What we are seeing now, toward the end of 2024, is simply the bill coming due for that unsustainable demand.

Samsung Electronics, in pursuit of an unrealistic goal of becoming the world’s No. 1 comprehensive semiconductor company—including foundry—by 2030, kept investing its roughly 100 trillion won in cash reserves without first securing customers. Intel, for its part, aggressively announced new fab projects, leveraging U.S. government subsidies and low-interest loans. Chinese semiconductor firms, seeking to circumvent U.S. export controls, placed massive equipment orders funded by generous state subsidies.

As I have warned repeatedly, Samsung’s foundry division has effectively lost its competitiveness to TSMC in leading-edge nodes below 5nm, while Intel, after spinning off its manufacturing unit, has adopted a strategy of outsourcing production to TSMC in order to restore the competitiveness of its latest CPUs. Even so, it continues to cede share in the highly profitable data center CPU market to AMD, and there is no sign that utilization at its own foundries will recover.

As a result, TSMC has effectively monopolized production of the most advanced chips for the world’s largest semiconductor design houses—Apple, Qualcomm, Nvidia, AMD, and Intel. This has allowed TSMC to enjoy high gross margins through rising utilization and strong pricing power, and its CAPEX spending remains at the upper end of its originally planned range.

In short, the indiscriminate overinvestment in capacity across the semiconductor industry over the past two years enabled equipment makers, including ASML, to post high growth rates. Now that Samsung Electronics and Intel—the two manufacturers that placed orders without realistic ROI calculations—are faltering, their reduced purchasing is eroding equipment makers’ customer base and pricing power. This normalization of what had been an irrational equipment market should not be overinterpreted as yet another “winter” for the entire semiconductor industry.

Conversely, TSMC, backed by strong competitiveness in leading-edge manufacturing, holds the upper hand in price negotiations with its customers, and its bargaining power on the procurement side is also improving. This suggests its already high margins are likely to be maintained or even increase.

*I would like to thank Mr. Park from Samsung Electronics for the insightful discussion on this topic.