Except for AI, all losers! ASML exposes the "fierce" trend of differentiation in the chip industry

The $530 billion semiconductor industry is experiencing a growing divide: companies that seize the wave of artificial intelligence are thriving, while those that miss this opportunity are falling far behind. Based on the preliminary results of the U.S. third-quarter earnings season, this divide may soon turn into a chasm.

"Without AI, the (chip) market will be very bleak," said Christophe Fouquet, CEO of Dutch chip manufacturing giant ASME, during a conference call last week.

ASME's third-quarter orders are only half of market expectations, as demand outside of AI weakens, the company has lowered its 2025 sales guidance. The disappointing performance led to ASME plummeting over 16% last week.

Furthermore, ASME's earnings report has sparked a new round of concerns about the health of the chip industry, with the Philadelphia Semiconductor Index plummeting last week, and the U.S.'s largest chip equipment manufacturer, Applied Materials, dropping over 12%, while KLA and Lam Research also plummeted.

Taiwan Semiconductor Manufacturing Company (TSMC) raised its 2024 sales guidance, easing these concerns. TSMC CEO Wei Zhejia stated in a conference call last Friday that AI demand is real, overall chip demand is stabilizing, and showing signs of improvement.

Despite the positive signals from AI, key markets such as personal computers and automobiles have yet to emerge from the winter, Gabelli Funds analyst Ryuta Makino predicts that the divergence in the chip industry will continue at least until 2025.

We should expect this divergence to continue, as it is entirely reasonable to assume that AI is underpinning everything.

Intel, Samsung Successively Disappoint, Are Traditional Chip Giants Entering a "Winter"?

Among the chip stocks that have reported earnings, in addition to ASME, two traditional chip giants are falling behind in the AI competition:

Intel is cutting costs and delaying the construction of new factories to address declining sales and increasing losses. After disappointing Q3 performance due to the delayed shipment of HBM3E high-bandwidth memory chips, Samsung made a rare apology to investors This week, investors will closely watch Texas Instruments' financial report, which will be released after the market closes on Tuesday Eastern Time, as its analog chip products are widely used by a diverse customer base.

Overall, for chip manufacturers, the road ahead is tough, with many companies seeing their stocks reach record highs earlier this year. Some traders have started to lose patience and sell off stocks.

Compared to the giants mentioned above, "We are more cautious about other semiconductor equipment companies," wrote Cantor Fitzgerald analyst CJ Muse in a research note:

We thought long-time leaders like ASML would perform better. Clearly, our assumption was wrong.

Lam Research reported earnings on October 23, KLA will report on October 30, and Applied Materials will report on November 14. Muse expects that these stocks still have more room to fall.

Will NVIDIA have the last laugh under massive AI capital expenditures?

As traditional giants like ASML face performance pressure, chip companies benefiting from the surge in AI spending emerge as the biggest winners.

Media estimates suggest that in the second quarter, Microsoft, Google parent Alphabet, Amazon, and Meta Platforms collectively invested over $50 billion in capital expenditures, with most of it going to compute component manufacturers. Most of these giants have indicated plans to invest more funds in the coming quarters to expand AI infrastructure.

According to Solita Marcelli, Chief Investment Officer for the Americas at UBS Global Wealth Management, AI chip sales are expected to reach $168 billion this year and jump to $245 billion by 2025.

In a research note last week, Marcelli wrote:

We remain optimistic about the strong growth prospects for AI chips and will closely monitor management's guidance on future demand in the coming days and weeks.

Undoubtedly, the biggest winner in this AI wave is NVIDIA, whose stock hit a new all-time high last week, surging 175% year-to-date and briefly surpassing Apple to become the world's most valuable company.

NVIDIA will report new quarterly earnings in November. Some views suggest that, considering the expensive stock price and the high base from the same period last year, NVIDIA's Q3 performance may "face challenges."

In the previous quarter's earnings report, NVIDIA's revenue guidance for the third quarter was $32.5 billion, in the middle of the expected range ($32 billion to $33 billion), falling short of the highest expectations, also signaling a potential slowdown in performance growth In addition to financial data, analysts say that investors will also closely monitor NVIDIA's AI investment scale and the latest news on the Blackwell chip.

It is worth noting that even some winners are not immune to the impact of a weak non-AI market, such as custom chip giant Broadcom, whose stock price plummeted last month after underperforming in non-AI business