ASML (ASML 0.60%) stock was down over 11% at one point during the trading day July 16 before closing the session down 8.3%. However, the growth stock continued falling over the next couple of days and is now down 21% over the past year.
The company makes advanced lithography machines that chip manufacturers use to produce chips designed by companies like Nvidia (NVDA 1.56%) and Broadcom (AVGO 4.11%). ASML's extreme ultraviolet (EUV) systems pack an unprecedented number of transistors into each silicon wafer, advancing precision and lowering manufacturing costs. These machines are the muscle behind the artificial intelligence (AI) revolution.
Here's what you need to know about the ASML sell-off, and whether it could have ripple effects that could drag Nvidia and Broadcom down from their all-time highs.
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ASML's solid results were overshadowed by its guidance
ASML reported its most recent quarterly results on July 16. It had a great second quarter and is guiding for 15% revenue growth and slightly higher gross margins for the full year. The semiconductor equipment supplier reaffirmed its 2030 targets, which forecast revenue to increase by 55% to 112% from its 2024 results of 28.3 billion euros ($32.81 billion), and gross margin expansion from the low 50% range to 56% to 60%.
The margin expansion is likely due to the company's anticipated increase in EUV machines in its sales mix. Right now, its older and less advanced deep ultraviolet machines (DUV) still make up the bulk of new sales. ASML brings in a significant amount of revenue by servicing existing machines for its customers. Margins should grow as the sales mix shifts to more expensive EUV machines -- especially its roughly $400 million ultra-powered high-numerical aperture (high-NA) versions.
The near-term results and the 2030 targets aren't the issue. Rather, it's a murky medium-term outlook. ASML cited geopolitical challenges and macroeconomic headwinds that are affecting its customers and the timing of their spending.
The company is directly affected by tariffs on imports to its U.S. manufacturing centers and field operations. ASML also sources components from around the world to build its machines, so it has a complex supply chain that is vulnerable to tariffs.
Although ASML is a Dutch company, the Netherlands works closely with the U.S. on trade policy. This limits ASML's ability to sell products to China, despite China's rapidly growing demand for semiconductor lithography systems. As it stands today, ASML can't sell its most advanced systems to China -- just older, lower-cost units.
There's also the indirect effect of tariffs, which could involve a more severe industrywide slowdown and a shift in customer sentiment. Given the uncertainty, ASML said that it cannot confirm it will grow in 2026. That's likely the reason that the stock is selling off.
NASDAQ: ASML
Key Data Points
Nvidia and Broadcom operate upstream of ASML along the AI value chain
ASML's latest earnings report and management commentary were a reminder of the cyclicality of the semiconductor industry. Despite widespread enthusiasm and spending on AI, downturns can still happen for geopolitical or macroeconomic reasons, from tariffs and trade policy to interest rates and the timing of the investment cycle.
Before Nvidia and Broadcom investors start to worry, it's important to remember that ASML operates in a very different sales cycle from those two companies. ASML sold just 76 new lithography units in its latest quarter. That's less than one sale per day. You would be hard-pressed to find a company with a market cap of nearly $290 billion with an order volume that small. But it's a testament to the sophistication of ASML's cutting-edge tech. The company has a virtual monopoly, and its customers are willing to pay a high price for its machines because they're worth it in the long run if they can reduce costs and improve precision. But because these units are so expensive, it's easier for a key customer to decide to delay a purchase by a year or two to wait for more favorable conditions.
In its latest quarter, ASML said that 35% of new system sales were in Taiwan, while 27% were in China, 19% were in South Korea, 10% were in the U.S., and 9% were in other places. You can bet that the majority of sales in Taiwan are going to Taiwan Semiconductor Manufacturing (TSM +0.42%), South Korea is probably Samsung Electronics (SSNL.F +55.02%), and the U.S. is mostly Intel (INTC +1.14%).
Nvidia and Broadcom have international exposure, too. But their sales cycle is far different because they aren't just selling a few big-ticket items every quarter. Nvidia makes most of its money selling graphics processing units (GPUs), software, and associated infrastructure to build AI ecosystems for hyperscalers. Hyperscalers like Microsoft (MSFT 1.57%) are raking in the free cash flow and pouring capital expenditures into AI investments -- benefiting Nvidia.
Broadcom is experiencing explosive growth from hyperscalers for its AI chips. But Broadcom does a lot outside AI, from network connectivity to cybersecurity, broadband, wireless, and infrastructure software.
Both Nvidia and Broadcom have international exposure and are vulnerable to trade tensions and tariff risks, but their sales cycles are distinctly different from ASML's. So ASML's warning of an impending slowdown doesn't necessarily mean the same for Nvidia and Broadcom. However, if fabs (the fabricators) slow down their investment, it could lead to a backlog buildup, which could delay shipments for chip designers.
Zooming out in the semiconductor industry
The sell-off in ASML stock is a reaction to near-term guidance and has nothing to do with the long-term investment. The best way to approach any chip stock, especially ones with expensive valuations like Nvidia and Broadcom, is to take a long-term view, preferably at least three to five years.
If you believe in the long-term growth of global connectivity and AI and that Nvidia and Broadcom will remain industry leaders, then both stocks are probably worth buying and holding. Even a few quarters or a few years of bad earnings will ultimately be made up for by the long-term investment thesis playing out.
However, the further stock prices outpace earnings growth, and the more expensive valuations become, the more hot air fills the stock price, which can go out just as fast as it went in. Therefore, it's essential to approach these stocks with the right mindset and accept that geopolitical and macroeconomic factors can have a massive effect on the stock prices of these companies in the short term.
