ASML's performance collapses, revealing the current situation of the chip industry: The AI ​​boom is not over, but it is not enough to drive a "prosperity cycle"

ASML, the giant of lithography machines known as the "pinnacle of human technology", unexpectedly released disappointing financial results, triggering a global semiconductor stock plunge. The weak performance of ASML has poured cold water on semiconductor stocks that have rebounded significantly from the "summer sell-off wave" recently. Incomplete statistics show that since the opening of the US stock market on Tuesday until the closing of the Japanese and South Korean stock markets on Wednesday, the total market value of global semiconductor stocks, including NVIDIA, AMD, SK Hynix, and Samsung, has evaporated by over $420 billion.

The process of ASML announcing its financial results was full of drama. ASML was originally scheduled to release its third-quarter financial report on Wednesday, but due to "technical issues", the financial report was unexpectedly posted on the company's official website during the early trading session of the US stock market on Tuesday. This can be described as a "bone-breaking" embarrassment. For a technological giant that controls the core lifeline of global semiconductor production capacity, such a major mistake is a rare and historic occurrence.

The exceptionally poor performance of ASML has astonished global investors: although the overall revenue exceeded expectations, the order size was only half of the market's expectations. Additionally, the sales target for next year and the gross margin guidance were unexpectedly lowered. In this "prematurely leaked" third-quarter financial report, ASML stated that the total order size for Q3 was only 2.6 billion euros, nearly half of the market's general expectation of 5.4 billion euros. At the same time, the company expects the total net sales to grow to between 30 billion and 35 billion euros by 2025. However, compared to the previous quarter, the company's guidance was 30-40 billion euros. This latest forecast figure is only in the lower half of the guidance provided at the 2022 Investor Day, indicating a significant reduction in sales prospects by ASML management.

After the financial report was released, ASML's ADR in the US stock market fell by over 17% at one point, ultimately closing down by 16.26% at $730.43. The company's stock price on the Amsterdam stock market also fell by 16%, marking the largest single-day decline since 1998, with multiple trading halts during the day. Following the sharp drop in ASML's stock price, the title of "Europe's highest market value technology company" changed hands, with ASML, the long-time lithography machine giant, passing the title to the German software leader SAP, which has greatly benefited from the AI boom.

In addition to the financial disappointment, there are reports that the US government is considering restricting American companies from selling the most advanced artificial intelligence chips to certain Middle Eastern countries. This includes the flagship data center AI chips in high demand by NVIDIA and AMD. This news further fueled the plunge in ASML's stock price, as the demand for AI chips from chip giants like NVIDIA may decline, potentially leading to TSMC reducing production capacity for AI chips from NVIDIA and others, and consequently lowering ASML's performance expectations logically.

However, from a rational investment perspective, ASML's performance in hitting global chip stocks does not mean that the global frenzy of AI deployment is retreating or cooling down. Instead, this financial report of a bombshell has indeed revealed the latest dynamics of the global chip industry. The key point is: the AI boom is still ongoing, especially the demand for all types of AI chips focusing on B-end data centers remains very strong. However, areas unrelated to AI are still experiencing weak demand or even a significant decline in demand.

ASML's Chief Financial Officer, Roger Dassen, has supported this market view in the performance statement. This ASML executive stated that the demand for AI-related chips is indeed increasing rapidly, but the recovery process of demand in other parts of the semiconductor market is weaker than expected, leading to some logic chip manufacturers delaying orders for lithography machines.

Prior to ASML's financial bombshell, there has long been an optimistic bullish view in the stock market that a new cycle of the entire chip industry's "prosperity cycle" had quietly begun in 2024. However, ASML's latest performance has cast doubt on this bullish view, prompting the market to sell off chip stocks. In other words, the global corporate and even government institutions' deployment of the AI boom has not faded, but this AI boom has not yet driven the entire chip industry, including industrial chips with long-term weak demand, electric vehicle chips, power chips, components, and most consumer electronics core chips including smartphones, into a "prosperous development cycle."

After ASML's financial bombshell, some analysts even exclaimed that even with ASML's dismal performance, it actually benefits the stock price trend of "AI shovelers" like NVIDIA, as the demand for data center AI chips remains strong. Looking at the stock price trend, ASML, which grasps the lifeline of chip production capacity, has significantly underperformed NVIDIA. Unconsciously, the market has already given the answer in real money as to who the biggest winner in chip stocks is.

ASML's downward revision of expectations may indicate a slight excess of chip production capacity, far from the end of the chip industry

Regarding ASML's weak performance report, some chip industry analysts believe that the bleak outlook may reflect some chip factories having excess production capacity. Major chip foundries such as TSMC, Intel, and Samsung have accumulated a large number of expensive ASML EUV tools during the COVID-19 pandemic and are adept at transforming and upgrading these tools to produce more high-end AI chips.

Currently, apart from AI chips, the inventory of other types of chips remains high. At the same time, after years of process exploration by chip manufacturers like TSMC, the efficiency of using ASML lithography machines has greatly improved, meaning they can produce more chips and are not in a hurry to order more lithography equipment For example, due to the lack of significant increase in demand for smartphones and PCs, TSMC, the "king of chip manufacturing", may refurbish and upgrade some EUV equipment for manufacturing 5nm and below smartphone and PC chips to meet the insatiable demand for NVIDIA's H100/H200 AI GPUs, the latest Blackwell architecture AI GPUs, and AMD's MI300 series GPUs, instead of continuing to invest heavily in purchasing expensive EUV equipment.

Of course, during the extremely high demand period for NVIDIA's AI GPUs from 2023 to 2024, ASML's financial reports for multiple quarters show that TSMC has been continuously purchasing new EUV equipment, but the scale of purchases is not as large as some analysts predicted. In the third quarter, the pace of purchases may slow down, highlighting the fact that with the continuous sluggishness in non-AI chip demand, foundries like TSMC are transforming and upgrading the excessive lithography equipment stockpiled since the pandemic to manufacture high-end AI chips. This largely reflects that the AI frenzy has not driven the entire chip industry into a growth cycle, and chip factories are operating with a slight excess capacity.

Therefore, foundries like TSMC can only order new EUV or DUV lithography machines when factory orders are full. Some analysts also indicate that ASML's latest forecast is a lagging indicator of the poor performance of these chip factories in recent months, revealing the current situation of sluggish non-AI chip demand in the chip market.

"Intel, TSMC, and Samsung may be retracting orders for lithography machines from ASML because they have realized that the capacity is very sufficient." Dan Hutcheson, Vice President of TechInsights, a technology-focused analysis company, stated in a recent interview.

"The capacity utilization of chip factories this year is about 81%, but manufacturers tend to purchase new lithography tools when it reaches around 90%. In addition, Intel has slowed down the pace of expansion of its U.S. factories, and Samsung and TSMC have also taken a cautious approach to expanding chip capacity recently," Hutcheson said.

Handel Jones, CEO of an international business strategy firm tracking the chip manufacturing industry, stated that some foundries have reduced the steps using ASML's flagship lithography machines, with some reducing them by almost one-third. Taking Samsung as an example, he mentioned that Samsung may be able to utilize more advanced chip etching technology in the future, reducing the steps using ASML's flagship lithography equipment from five or six to just one or two steps. He mentioned that if successful, Samsung may face a significant excess chip manufacturing capacity on these EUV lithography machines.

However, Jones, who has been tracking the dynamics of the chip industry for many years, pointed out that he has not changed his forecast for the entire chip industry. With the complete innovation of various industries' productivity after the iterative updates of large AI models, the demand for AI chips and AI-specific storage chips will flourish, inevitably driving the entire chip industry, including industrial simulation chips, electric vehicle chips, and consumer electronics SoC chips, into a prosperous period. "This is just a short-term fluctuation in the chip industry. In the long run, everything will improve."

The AI ​​boom is still in full swing, but the entire chip industry has not fully benefited from it

ASML's performance results indicate a significant differentiation in the fate of global chip companies: Artificial intelligence applications such as ChatGPT and Sora, which require data center server-side AI chips capable of handling massive parallel computing patterns and high computational density matrix operations, such as NVIDIA's AI GPUs, have seen a surge in demand, overshadowing the extremely low demand in other segments of the industry.

ASML did not elaborate on why its third-quarter orders were less than half of analysts' expectations, only stating that some customers postponed factory construction. Analysts speculate that the "customers" referred to by ASML should be Intel and TSMC - the two major chip manufacturers have previously indicated a slowdown in chip factory construction globally. Faced with shrinking chip product sales and increased net losses in chip foundry business, Intel is significantly slowing down chip factory construction, postponing plans to build new factories in Germany and Poland last month.

Janardan Menon, an analyst at JPMorgan from Wall Street, stated in a report on Wednesday, "ASML's financial report shows that although the demand for chips related to artificial intelligence remains very strong, the recovery in other areas is significantly lagging behind, and this trend may continue until 2025."

In a recent report, analysts from another major bank, Bernstein, stated, "We are concerned that the time needed for the recovery of end demand is longer, leading to a significant delay in chip capacity expansion, which is exactly what we will face in 2025." "It seems that we may need to be patient until the cyclical recovery of the chip industry becomes clearer."

According to the latest semiconductor industry outlook data released by the World Semiconductor Trade Statistics (WSTS), AI-driven memory chips and logic chips such as GPUs and CPUs are the main drivers of the overall recovery of the chip industry. In contrast, WSTS' expectations for the analog and microchip market covering electric vehicles, industrial sectors, IoT devices, as well as more widely consumed consumer electronics products such as PS5 and Switch, appear very bleak, even predicting negative growth in the analog chip market size this year, with a weak recovery process expected next year.

WSTS stated that the revised expectations for 2024 reflect strong performance in the past two quarters, especially in the computing terminal market. After a significant market contraction in 2023, WSTS expects that in 2024, two core chip product categories will drive double-digit sales growth in 2024, with total sales of logic chips, including the surging demand for NVIDIA AI GPUs and AI ASICs, expected to increase by 10.7%, and the storage chip category, which best reflects the chip cycle, expected to surge by 76.8% in 2024 - WSTS predicts strong demand for storage chips will focus on HBM used in AI training/inference fields, as well as enterprise-grade DRAM and NAND storage systems crucial for efficient operation of AI data centers

The situation of AI-driven storage and logic chip demand can be clearly seen from the inventory and export scale of chips in South Korea, the home of the world's two largest memory chip manufacturers - SK Hynix and Samsung.

Data released by the South Korean government shows that despite a slowdown in growth, semiconductor exports in September still increased significantly by 37% year-on-year, marking the 11th consecutive month of growth. This growth, accounting for one-third of the continuous growth in chip exports, is largely contributed by HBM memory systems. HBM memory systems, in collaboration with the core hardware provided by AI chip leader NVIDIA - H100/H200/GB200 AI GPUs, are essential for driving heavyweight artificial intelligence applications such as ChatGPT and Sora. The stronger the demand for HBM, the more intense the demand for AI chips.

Recently, the Wall Street banking giant Bank of America released a research report stating that the global artificial intelligence boom is still in its early stages, similar to the development path of the Internet in the 1990s. It can be likened to the "1996 moment" of the Internet's booming development, indicating that in the view of the Bank of America's analysis team, the AI boom is still in a very early stage.

"Investors may underestimate the long-term impact of this technology while overestimating its short-term potential, but this is also a typical feature of technological prosperity. It is expected that in the coming years, capital expenditures related to artificial intelligence may exceed $1 trillion, but compared to the Internet era, the development of artificial intelligence is just beginning," the Bank of America pointed out in the report