ASML shares fall 10% as China risk casts shadow over solid Q2 earnings

CEO says 2024 is a ‘transition year’
He argues that strong development of artificial intelligence should drive economic recovery
Stocks fall more than 10% on China fears
Analysts say geopolitics outweighs results for now

AMSTERDAM, July 17 (Reuters) – ASML shares (ASML.AS)opens a new tablargest supplier of equipment for manufacturing integrated circuits, saw a significant drop on Wednesday due to pressure from the U.S. government that could lead to tighter export restrictions to China.

Investor concerns overshadowed Europe’s largest technology company’s second-quarter results, which beat forecasts and saw a rise in artificial intelligence-related bookings and continued strong sales in China.

Shares fell more than 10% after Bloomberg reported Tuesday that the United States had informed allies including the Netherlands that it could take unilateral action to restrict exports of chip-making equipment to China if they fail to do so themselves.

“We don’t comment on rumours,” Christophe Fouquet said in his first analyst call after the earnings announcement.

ASML is already banned from selling most of its advanced product lines in China. Fouquet added that the company also faces restrictions on servicing existing equipment at some Chinese plants due to U.S. and European regulations.

The Dutch Foreign Ministry said it could not comment on the report but was in close contact with allies on export controls, which it said was a matter of national security.

Fouquet said ASML still sees 2024 as a “transition year” with overall weak results, as it prepares for a strong 2025.

“We are currently seeing strong developments in artificial intelligence, which is driving most of the industry’s recovery and growth, outpacing other market segments,” Fouquet said.

Net income of 1.6 billion euros ($1.74 billion) for the quarter ended June 30 was down 19% from a year earlier but beat analysts’ expectations of 1.41 billion euros, LSEG data showed.

Revenue fell 9.5% to €6.2 billion, but exceeded analysts’ estimates of €6.04 billion.

ASML dominates the market for lithography systems, complex tools that use lasers to create tiny circuits for computer chips.

OLDER GENERATION

Item 1 of 2 Assembly engineers work on a TWINSCAN DUV lithography system at ASML in Veldhoven, Netherlands, June 16, 2023. REUTERS/Piroschka van de Wouw/File photo

(1/2)Assembly engineers work on a TWINSCAN DUV lithography system at ASML in Veldhoven, Netherlands, June 16, 2023. REUTERS/Piroschka van de Wouw/File photo Purchase Licensing Lawsopens a new tab

Chinese chipmakers, grappling with increasing U.S. restrictions on ASML’s high-end equipment, have ramped up purchases of equipment used to make older generations of integrated circuits commonly used in cars and industrial applications.

China, which is ASML’s third largest sales market after Taiwan and South Korea, accounted for sales of lithography systems worth more than €2 billion in the second quarter, or around 49% of the total.

Chief Financial Officer Roger Dassen said about 20% of the company’s current orders are for sales to China, and those tools are likely to be sold elsewhere if not in China, given growing global demand for older chips.

Analysts linked the stock price decline to a Bloomberg report and remarks published by the agency after an interview with U.S. presidential candidate Donald Trump in June, in which he said Taiwan had taken over “100% of our chip business.”

ASML’s largest customer is the Taiwanese company TSMC (2330.TW)opens a new tabwhich produces integrated circuits for Nvidia (NVDA.O)opens a new tab and Apple (AAPL.O)opens a new tab.

“The geopolitical aspect… is now more likely than the results,” Citi analysts wrote in a note.

“The arguments made (in the Bloomberg report) are not new, but pressure is growing” for further restrictions, they said.

Shares in Europe’s second-largest listed company after pharmaceutical maker Novo Nordisk were down 7.9 percent at 900.00 euros by 12:36 GMT, dragging down shares of other European chipmakers.

ASML shares are up 28% year-on-year after falling on Wednesday.

The earnings report said new bookings rose to €5.6 billion from €3.6 billion in the first quarter, with about half of that amount coming from its most advanced EUV product lines, which are essential for making chips for smartphones and artificial intelligence.

Analysts had expected ASML’s order value to rise to around €5 billion, according to estimates by Visible Alpha.

“EUV orders increased significantly” this quarter, Mihuzo Securities analyst Kevin Wang told Reuters. “We attribute this to strong orders from TSMC and Intel.”

TSMC, Intel and Samsung are participating in construction projects that are planned to be equipped with equipment between 2025 and 2027.

(1 dollar = 0.9172 euros)

Reporting by Toby Sterling; editing by Janane Venkatraman, Varun HK, Jason Neely and Barbara Lewis

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