Shares of semiconductor giants ASML Holdings (ASML -0.04%), Micron Technology (MU -0.42%), and Advanced Micro Devices (AMD -5.53%) fell this week, down 14.8%, 12.1%, and 14.2%, respectively, as of the end of the trading day Thursday, according to data from S&P Global Market Intelligence.
There was a slew of semiconductor news this week, coming both from within and outside these companies. While not all of it was bad, given the outsized performance of the sector year to date, investors decided to take profits in a significant way as risks grew.
ASML earnings beat, but the prospect of China tensions and increased restrictions loom
ASML held its second-quarter earnings this week. In the quarter, ASML's sales rose 18%, with earnings per share up 29%, with both figures beating analyst estimates. Bookings, a closely watched figure by analysts, came in at 5.57 billion Euros, up a strong 54% from a year ago.
If there was a problem, it was that ASML guided to a third quarter that, while above second-quarter results, was a tad below analyst expectations. Still, Raymond James analyst Srini Pajjuri wrote the next day that he sees the guide as due to timing, and not any weakening in demand. There are a number of semiconductor fabs set to come online in 2025, after all, and ASML is still projecting a big growth year next year after a flat 2024. None of that changed with this earnings report.
Image source: Getty Images.
However, the prospect of more export controls to China likely hurt ASML and the rest of the semicap equipment sub-sector. On Wednesday, it was reported that the Biden Administration was floating the idea of more controls on equipment sales to China, despite already cutting off many advanced machine sales in late 2022, and despite ASML never having had permission to sell extreme ultraviolet (EUV) lithography machines there.
Last year, Chinese company Huawei was able to produce a 7nm chip, which was thought to be above the capabilities of older equipment. Huawei likely used double-patterning of ASML's less-advanced deep ultraviolet (DUV) equipment to achieve this. The most advanced Western chips are already on the 3nm node. Still, investors may have grown worried that ASML's current sales to China, which made up 49% of sales last quarter, would be limited further going forward.
Also on Wednesday, Bloomberg Businessweek published an interview with former President Donald Trump. In the interview, when asked about the U.S. backing Taiwan in the event of a Chinese attack, Trump didn't say if the U.S. would back Taiwan and actually criticized Taiwan for "taking" so much of the chip manufacturing industry.
These comments absolutely pummeled most of the chip sector on Wednesday, especially chipmakers who have all or part of their production in Taiwan. This includes AMD, whose chips are manufactured by Taiwan Semiconductor Manufacturing, and Micron, which has its largest, most advanced DRAM fab in Taiwan.
Brink of a downturn, or just a mild pullback?
The pullback in semiconductors has been swift and severe this week, but that's not unexpected, given the massive 18-month rally many of these stocks have had. However, the question remains as to whether this is a garden-variety pullback in a larger chip bull market, or if it's the start of the next long semiconductor slump. Those can be painful, as the downturns of 2018 and 2022 showed.
However, with AI spending seemingly set to continue, and with other segments like PCs and smartphones just beginning to recover from their post-pandemic slump, this seems like more of a pullback than a prolonged downturn.
Still, chip investors should keep their eyes and ears out for any sort of weakening in AI investment, or if geopolitical tensions with China rise as the election approaches. Those factors could derail the ongoing recovery.
