What happened
Shares of the world's dominant semiconductor lithography machine maker, ASML (ASML -2.05%), were falling hard in Monday trading, down 4.8% as of 1:09 p.m. ET.
ASML has a monopoly on extreme ultraviolet lithography, or EUV, which is a crucial technology in making logic chips with transistors 7 nm apart or below, and is beginning to be used in DRAM memory chip production as well.
ASML's growth and backlog has continued to increase over the past year, even as the semiconductor industry went into a broad slump in mid-2022. That may have led some to believe EUV was immune from the semiconductor cycle, as chip manufacturers generally invest in the latest technology and move to the next node as quickly as possible.
However, on Monday there were reports the slump has become severe enough that even EUV orders may be cancelled this year and pushed out into the future.
So what
On Monday, the Taiwan Economic Times reported that Taiwan Semiconductor Manufacturing (TSM -4.86%), the world's leading outsourced foundry with a dominant share in leading-edge chip fabrication, would be cutting back on its capital expenditures for 2023. Prior to today, TSMC had forecast a range of $32 billion to $36 billion in 2023 capex, compared with its all-time high of $36.3 billion spent last year. However, the Economic Times reported that range will now be $28 billion to $32 billion.
Obviously, a pullback in spending from the world's largest chipmaker isn't good for any of the major semiconductor capital equipment companies. Not only does that lower the 2023 outlook for spending from the largest source of spend, but it could also signal worse industry weakness than had already been anticipated.
Two weeks ago, IDC reported PC shipments were down a stunning 29% in the first quarter from a year ago. And TSMC itself reported a larger-than-expected decline in March revenue one week ago.
Additionally, on the back of the Taiwan Economic Times reporting, Digitimes included that the decrease in TSMC's capital plans included its first-ever order cut for EUV equipment.
So, while EUV equipment had been thought by some to be somewhat immune from the semiconductor cycle, it does appear that this downturn is affecting orders even for these valuable and sought-after machines. Given that ASML trades at a healthy 41 times earnings and 32 times this year's estimates, and was still up some 22% on the year even after today's drop, it's no wonder the stock is falling hard today.
Now what
While this semiconductor downturn has been deeper than expected by just about everyone, including the largest and most well-informed companies, investors with a longer-term perspective shouldn't necessarily change their thesis on ASML. Looking beyond this downturn, chip demand should increase at a healthy average growth rate through this decade, especially for the most advanced chips that go into artificial intelligence and other leading applications. So those EUV orders will eventually be filled -- maybe in 2024 rather than 2023 -- but likely at some point not much further down the road.
With a monopoly on the key technology that makes these crucial tech applications happen, ASML is still in a good spot -- even if its growth may not be quite as consistent as some might like.
