Shares of semiconductor equipment stocks ASML Holdings (ASML 1.06%), KLA (KLAC +1.45%), and Lam Research (LRCX +2.70%) were plunging on Monday, down 6.8%, 4.7%, and 6.7%, respectively, as of 3:52 p.m. ET
Semiconductor stocks are long-term growers, but they also have cyclical qualities as well. Therefore, today's fears over a tariff-induced recession is causing a big sell-off.
In addition, tariffs that increase trade tensions with China tend to especially complicate things for semiconductor stocks. This is because China is a big purchaser of chips, and its government is also investing heavily in domestic chipmaking alternatives, including homegrown semiconductor equipment stocks.
On that note, there was also a report today that China is developing an alternative to extreme ultraviolet (EUV) technology. That may have hit ASML especially, which currently has a monopoly on EUV and dominates lithography technology generally.
NASDAQ: ASML
Key Data Points
Recession fears, China tensions aren't a good recipe for semi stocks
Over the weekend, President Trump gave an interview to Fox News' Maria Bartiromo. Bartiromo asked Trump if he predicted a recession as a consequence of the tariffs his administration has implemented, and the additional tariffs it's still considering.
After the past few weeks' turmoil, investors were likely hoping for reassurance. Instead, Trump wouldn't say whether a recession would occur, nor did he give any reassurance he would change his tariff stance should such a slowdown occur, saying:
I hate to predict things like that. There is a period of transition, because what we're doing is very big. We are bringing wealth back to America. That's a big thing. And there are always periods of -- it takes a little time.
Those comments hit basically all economically sensitive stocks, which includes tech stocks, and especially semiconductor and other hardware stocks.
In addition, tariffs on China can doubly affect semiconductor stocks. This is because China is a huge buyer of chips, and its government is feverishly investing to develop more homegrown semiconductors. Therefore, restrictions on selling equipment to China, or greater restrictions on advanced artificial intelligence (AI) and memory chips, could lead China to blacklist U.S.-made semiconductors in retaliation.
Now, for some semiconductor categories, there aren't really alternatives to U.S.-designed semiconductors today. But for others, China could increasingly look to domestic alternatives, or potentially alternatives that are made in Europe or South Korea.
Image source: Getty Images.
The biggest hurdle to China producing more semiconductors is in the semiconductor equipment space, which is still dominated by these three stocks and their peers. Advanced chip manufacturing is extremely technologically complex. Therefore, China has not been able to make much headway in the semiconductor equipment space.
But that doesn't mean China isn't trying. According to Trendforce, China has increased its usage of domestic chipmaking tools to 13.6% last year. While most of that is on trailing nodes, China is also trying to crack the code of more challenging leading-edge chipmaking, too.
On that note, on Monday, TechPowerUp reported that China is about to unveil its own alternative to ASML's EUV technology later this year. According to the publication, researchers in China have developed laser-induced discharge plasma (LDP) technology, an alternative to producing 13.5nm light. That's the wavelength of ASML's low-NA EUV machines, which are banned in China and critical to producing leading-edge semiconductors below 7nm.
This new LDP technology had been reported on in the South China Post back in January. But TechPowerUp is an international publication, and its reporting that China's LDP technology will go to trial production in the third quarter could indicate China is getting closer to having the ability to make its own advanced chips.
Where to go from here
Going back to 2018, semiconductor stocks plunged on similar trade war and macroeconomic fears during a chaotic period in the first Trump administration. That proved to be a terrific long-term buying opportunity for semiconductor and semiconductor equipment stocks.
Moreover, while China's LDP technology is certainly worth monitoring, it's far from clear that it will be able to mimic the capabilities of EUV, especially in a production setting. ASML's EUV technology took nearly 20 years of development before it produced its first commercial chip in a production setting. So, color this investor skeptical that China's LDP technology is on the verge of being a viable lithography competitor anytime soon.
Of course, these stocks aren't quite as cheap as they were back at the 2018 bottom. Nevertheless, that was also before cloud computing, work-from-home, and the AI revolutions took off in a big way. All these megatrends should act as a tailwind to chip and chip equipment stocks going forward.
While it's hard to say how the cloudy macroeconomic picture may affect these stocks in the near term, these harsh sell-offs in semiconductor industry leaders tend to be buying opportunities. If I had to bet, I'd say this is likely to be a similar opportunity, rather than the beginning of the end.
