Chipmaker Chill: ASML Stock Slide Signals Caution

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Many U.S.-based stock traders aren’t aware of ASML Holding N.V. (NASDAQ:ASML), but they ought to be. It’s a crucial link in the global chipmaking chain, and ASML’s recently released quarterly report effectively raises a red flag for the broader tech-hardware market.

Bloomberg describes ASML as the “world’s sole producer of equipment needed to make the most advanced chips.” Thus, if ASML’s business is hindered by soft demand, it’s possibly a sign of a slowdown in the global chipmaking industry.

In other words, there are big-picture implications as chip companies like NVIDIA (NASDAQ:NVDA) and Advanced Micro Devices (NASDAQ:AMD) have helped support the NASDAQ bull market of the past year. So, while ASML is a Dutch firm, its success or failure will surely have ripple effects that reach the U.S.

ASML stock: Rejected at $1,000

Numbers with lots of zeros feel important to financial traders. Hence, it was undoubtedly a notable event when ASML stock touched $1,000 for a hot minute in early March.

In hindsight, it’s easy to say that the stock wasn’t ready for quadruple digits yet. It was too much, too fast, as ASML shares were only worth $600 apiece as recently as October of 2023.

Perhaps today’s drawdown in ASML stock, along with the clear rejection of the $1,000 level, is an instance of the market’s weighing machine taking effect. After all, the sector median’s GAAP trailing 12-month price-to-earnings (P/E) ratio is 27.66, while ASML’s P/E ratio is significantly higher at 44.18.

How did the stock reach the eye-watering $1,000 level in the first place? One contributing factor, no doubt, is the market’s enthusiasm for advanced, artificial intelligence (AI) enabled chips. ASML manufactures extreme ultraviolet (EUV) lithography machines that companies like Taiwan Semiconductor (NYSE:TSM) use to make advanced semiconductors.

Taiwan Semiconductor isn’t a “Magnificent Seven” member, but it’s still a market darling, more or less. So, simply being associated with Taiwan Semiconductor has added a hype factor to ASML stock. Besides, ASML has an undisputed position in its global niche market. As Bernstein analyst Sara Russo explained in a note, “ASML’s dominance in lithography does seem set to continue.”

Even if the company is a niche-market dominator, it’s reasonable to assess that ASML share buyers got ahead of themselves this year. In January, Russo lifted her ASML share-price target from $664 to $869, which is a substantial price hike. By early March, the stock blew past that target and hit $1,000 — but today, it’s on a definite downtrend.

A rough start to a “transition year”

“We see 2024 as a transition year,” ASML CEO Peter Wennink declared in a statement in conjunction with the company’s first-quarter 2024 data release.

Often, investors have to decode CEO-speak as executives tend to soften the blow of bad news with euphemistic verbiage.

In this instance, “transition” may be a code word for “trouble.” 2024 is off to a rough start for ASML as the company’s first-quarter net bookings (i.e., product orders) totaled 3.611 billion euros, or $3.84 billion. This result falls far short of the analysts’ consensus estimate of nearly 5.10 billion euros in quarterly bookings. It’s also a steep fall-off when compared to ASML’s 9.186 billion euros in bookings from the prior quarter.

If 2024 is to be a “transition year” for ASML, then that “transition” will need to start soon. Despite the low first-quarter bookings result, Wennink assured that the company’s “outlook for the full year 2024 is unchanged.” The CEO further posited that the “second half of the year expected to be stronger than the first half, in line with the industry’s continued recovery from the downturn.”

In other words, Wennink wants investors to stay calm and carry on, as things will get better in a few months. It’s awfully hard to stay calm, though, as ASML’s total net sales declined from 7.237 billion euros in 2023’s fourth quarter to 5.29 billion euros in this year’s first quarter.

Worse yet, during that same time frame, ASML’s net income plunged from 2.048 billion euros to 1.224 billion euros. So far, as ASML stock retraces from its $1,000 perch, 2024 looks more like a “reckoning year” than a “transition year.”

This doesn’t necessarily mean the global semiconductor industry is about to collapse. Nonetheless, as a critical supplier to that industry, ASML may be viewed as the proverbial canary in the chipmaker-market coal mine — and right now, that canary isn’t making a happy sound.