Semiconductor stocks tumbled on Wednesday after ASML (NASDAQ: ASML) released its first major earnings report for the industry. Management was optimistic about the future of artificial intelligence (AI), which has buoyed semiconductor stocks this year, but still expected sales to be flat this year.
In response, shares of Nvidia (NASDAQ: NVDA) fell as much as 7.6% in trading on Wednesday, Arm Holding (NASDAQ: ARM) dropped 9.6% and Micron Technology (NASDAQ: MU) fell 6.2%. As of 3pm ET, the stocks were down 6.7%, 9.2% and 6.1%, respectively.
ASML was not bullish.
When a stock price soars, so do expectations for the company. ASML is no exception: Although it beat expectations in the second quarter, investors were disappointed when management didn’t raise its full-year sales outlook from its previous forecast of “even in 2023.”
Nvidia, Arm and Micron aren’t competitors to ASML, but they’re downstream in the supply chain and ultimately drive demand for the company’s equipment. Expectations have been high for these chip stocks, and ASML is the first to signal it may not see the explosive growth investors expect.
ASML Chart
There’s a delicate balance between pricing in growth and being so expensive that even a slight miss in guidance could send the stock tumbling, and given how quickly AI stocks have rallied, the market is likely to pounce on any signs of weakness.
China and Taiwan are again a concern
The Biden administration has said it may tighten restrictions on companies that do business with China, including ASML and Nvidia. There are already restrictions on what equipment can be sold to China, but restricting how workers maintain that equipment could further stifle demand.
Despite US efforts to disrupt China’s advanced semiconductor manufacturing, many companies still rely on China for significant revenue, and targeting companies like Nvidia, Arm and Micron could dampen demand for AI at a time when it is on the rise around the world.
China may eventually be forced to develop its own semiconductor tools and AI chips to compete with these companies, as it already does.
Taiwan, where most of the world’s advanced chips are made, is caught up in the conflict because of its proximity to China and China’s territorial claims over the island. This puts chip companies in a delicate position, and given the high valuations of these stocks, it’s no surprise that investors are taking a “risk averse” approach today.
The reality of AI
Tensions with China continue to wax and wane, which should come as no surprise to semiconductor investors, and the latest news doesn’t appear to pose any greater risk to investors than what they knew about the industry a day or two ago.
The story continues
An even bigger impact will be the rising demand for semiconductor equipment and chips as the AI boom matures. Investors expect Nvidia’s revenue to more than double this year and double again in 2025. Arm is expected to grow 25% this fiscal year, while Micron is expected to grow 62% in fiscal 2024 and another 52% in fiscal 2025.
Those are big hurdles to clear, and any signs that they won’t be met would send the stock lower. It’s unclear whether ASML’s caution is a sign that the industry isn’t growing as fast as hoped, but we’ll know when it reports earnings in the next month.
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Travis Hoium has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends ASML and Nvidia. The Motley Fool has a disclosure policy.
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