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ASML's Earnings Miss Opens Door for Savvy Investors

By: MarketBeat

October 16, 2024 at 08:15 AM EDT

The logo of ASML Company,is displayed on a smartphone.indonesia - June 16th 2024. - Stock Editorial Photography

The darling niche of the technology sector today is found in the semiconductor and chip-making industry, where most of the interest—and capital—has been focused since 2023. Pushed by secular tailwinds from artificial intelligence and other advancements, markets have somewhat priced in all potential future growth in these stocks, creating some risk in the coming quarters.

Today, these risks have taken on a new form of reality, as shares of Dutch chipmaker ASML Holding (NASDAQ: ASML) have crashed by over 16.6% in a single day following its most recent quarterly earnings results. These figures were accidentally released ahead of schedule, but that doesn’t take away from the fact that the underlying numbers disappointed investors who had high hopes for the rest of the industry this year.

Of course, this also affects some other sector favorites, like NVIDIA Co. (NASDAQ: NVDA) and Taiwan Semiconductor Manufacturing Co. (NYSE: TSM), ahead of their own earnings to be released this month. Every investor is now looking for the answer to whether ASML’s bearish price action results from an industry-wide slowdown or due to company-specific issues happening today. Here’s a way to get that answer today.

ASML Stock Slowdown: Could This Be Just the Beginning for the Semiconductor Industry?

It all started with one of the main drivers for the business, a key performance indicator (KPI) shared throughout the industry: the amount of future bookings and orders being made today. According to analyst projections, the market was expecting up to 5.39 billion Euros worth of new bookings and orders for ASML.

Instead, ASML reported only €2.6 billion (about $2.8 billion) in bookings, less than half of what these analysts were projecting. That would be enough to erase any bullish revenue or net income figure for the quarter, which was the case. ASML reported revenues of €7.4 billion ($8.1 billion), up from €6.2 billion ($6.75 billion) a year ago, reflecting a 19.3% increase and demonstrating current momentum.

The issues quoted by the company’s CEO in a press release issued on the investors relations website are due to longer-than-expected recoveries in the consumer market for these chips. More than that, there are issues with inventories, not that there is too little to go around (as was the case during COVID-19) but that there is a state of oversupply today.

Combining too much supply with falling demand is a recipe for margin and earnings per share (EPS) destruction, creating a potential tailwind for names beyond ASML in this case. When investors break down the trend inside the manufacturing PMI index, these issues could potentially extend to stocks like NVIDIA and Taiwan Semiconductor in the coming months.

Contractions over the past quarter in the electrical equipment industry could have been a warning for investors to consider ahead of these upcoming earnings announcements from the big chipmakers. But that’s only one side of the story. Now, it’s time to check with Wall Street analysts and broader markets to gauge the future of ASML and other names further.

Wall Street Turns Bearish on ASML: Will Other Chipmakers Feel the Impact?

Recently, analysts at some of the biggest banks in the United States released their latest price targets for ASML stock, and investors will notice that their views are now turning on the bearish side as these weak bookings are digested alongside the rest of industry dynamics.

Wells Fargo analysts lowered their targets on ASML stock to $1,000 a share well before the earnings announcement, calling for a double-digit downside ahead of this week’s earnings selloff. Investors should note that others at Susquehanna and J.P. Morgan Chase also lowered their price targets ahead of the announcement.

While today’s price targets are still above the stock price after the selloff, it doesn’t necessarily mean that there is no upside in the company, as further downgrades and lower targets might follow after the new numbers and projections are crunched by these analysts.

Markets are getting ahead of the curb, though, as they are now discounting ASML stock to a price-to-earnings ratio (P/E) of only 47.1x today, a discount of over 80% to the computer sector’s average valuation of 243x today. The saying “It must be cheap for a reason” would pay off in this case, but it doesn’t stop there.

NVIDIA stock is another victim of this shifting sentiment. The stock is now down to 64.8x P/E, offering another double-digit discount to the computer sector’s average P/E valuation, and for good reason, as falling ASML fundamentals would suggest.

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ASML's Earnings Miss Opens Door for Savvy Investors

ASML Stock Slowdown: Could This Be Just the Beginning for the Semiconductor Industry?

Wall Street Turns Bearish on ASML: Will Other Chipmakers Feel the Impact?

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