ASML's (ASML) disappointing earnings report on Tuesday fueled a widespread chip stock sell-off that dragged down Nvidia (NVDA) and others in the sector, but industry analysts told Yahoo Finance that it doesn't signal AI chip demand is weakening more broadly.

ASML — previously Europe’s most valuable tech firm before shares began to plunge this week — is the leading manufacturer of machines used by TSMC (TSM) to make Nvidia's (NVDA) chips. The Dutch firm’s quarterly financial report Tuesday, released a day early in an apparent error, contributed to a massive plunge in chip stocks. The PHLX Semiconductor index (^SOX) fell more than 5% following the report, far underperforming the S&P 500 (^GSPC), which fell 0.7% Tuesday.

Meanwhile, Nvidia sank 4.5%. Its rival Advanced Micro Devices (AMD) fell 5.2%, and chipmaker Broadcom (AVGO) dropped 3.5%. Chip stocks began to recover Wednesday, with Nvidia rising 3%, AVGO up 0.5%, and AMD falling a modest 0.3%. ASML itself fell 16% Tuesday and dropped another 6.4% Wednesday.

ASML’s earnings release showed that it booked orders worth less than half the value forecast by Wall Street analysts tracked by Bloomberg. Order bookings are a metric of future demand for ASML machines. Though ASML’s earnings per share of €5.28 ($5.80) and revenues of €7.5 billion ($8.2 billion) surpassed analyst forecasts for the quarter, its bookings totaled just €2.6 billion ($2.8 billion), versus the €5.39 billion expected, according to Bloomberg consensus data.

ASML's outlook for next year wasn't as sunny as its previous forecast. ASML lowered the top range of its 2025 sales guidance, forecasting sales between €30 billion ($32.6 billion) and €35 billion ($38 billion), whereas its previous top range estimate was €40 billion ($43.5 billion). The company also lowered its profit outlook, predicting a gross margin of 51% to 53% versus its prior outlook of 54% to 56%.

Wall Street analysts have indicated in separate notes to investors this week that demand for AI chips remains strong, despite the rout in AI semiconductor stocks accelerated by ASML’s report.

“If there was one bright spot from the report it seems to be AI demand,” said Bernstein analyst Stacy Rasgon in a note Tuesday. He said the sell-off of Nvidia, AMD, and Broadcom stocks Tuesday was “potentially overdone.”

Meanwhile, Mizuho analyst Kevin Wang wrote in a Wednesday note that he sees “continued AI booming” into 2025 and 2026.

A 'sector divergence'

Bank of America analysts said ASML’s earnings “point to a sector divergence between robust AI demand and weak non-AI demand.”

Despite the significant Big Tech spending on artificial intelligence infrastructure and the resulting boom in AI chipmakers’ valuations, AI demand still accounts for a relatively small share of semiconductor manufacturers’ sales, according to KBC Securities analyst Thibault Leneeuw. In other words, the underperformance of ASML says more about the traditional semiconductor sector — chips currently used in smartphones, computers, utilities, cars, and more — than it does about AI demand.

Leneeuw told Yahoo Finance that Nvidia and AMD accounted for about 7% of sales within the chip manufacturing sector.

“AI can therefore perform strong and we expect continued strong performance of AI,” he said, “yet the remaining 93% of semiconductor demand (Smartphones, high performing computing, automotive, industrials, etc.) are weak and this is an important distinction.”

ASML CEO Christophe Fouquet said in a call with investors Wednesday morning, “While we continue to view Al as a key driver of industry recovery with potential upside, we see other segments recovering more slowly than anticipated.”

The AI chip market is set to grow 99% in 2024 and another 74% next year. Meanwhile, the semiconductor market overall is projected to grow 18% this year and 12% in 2025, according to consulting firm International Business Strategies, which tracks industry data. IBS data shows the AI chip market — also known as the accelerator chip market — outpacing the sector at large through 2030.

Additionally, Intel’s recent struggles and reduction in capital expenditures played a role in ASML’s lowered guidance, Bank of America analysts said. Intel (INTC), TSMC, and Samsung (005930.KS) are ASML’s primary customers, accounting for a lion’s share of revenue. Intel does not manufacture Nvidia or AMD chips.

China trade tensions take their toll

To be sure, ASML’s weaker outlook was in large part due to the company's view that spending by Chinese companies — which surged in the past two years — will return to "a more normalized percentage of our business" in 2025. China demand is a factor that could affect others in the chip sector.

Chinese firms accounted for a much higher-than-usual share of ASML revenues in 2023 and 2024, with China accounting for 45% to 50% of ASML's revenue this year, according to analysts. ASML's CFO Roger Dassen said on a call with investors Wednesday that China will likely contribute closer to 20% of the company's sales next year, with the company taking a more cautious outlook on China sales due to the company's speculation over further export controls.

Bank of America said there is a "high likelihood China pulled in equipment purchases over the last two years ahead of elections and further geopolitical tensions."

The Dutch government last month tightened export restrictions by expanding licensing requirements for some of ASML’s machines — an attempt to further limit China’s access to the tech. Under pressure from the US, the Netherlands has never allowed ASML to ship its most advanced EUV machines — which are required to make advanced semiconductors — to Chinese chipmakers. ASML machines rely heavily on components made in the US.

Argus Research analyst Jim Kelleher sees ASML’s reduced reliance on China as an overall positive despite the near-term hit to sales. “China is politically volatile and could face worsening restrictions at any time; both US political parties have threatened additional restrictions should they win the White House,” he said. “So we see it as very positive for ASML to reduce the revenue contribution from China.”

Laura Bratton is a reporter for Yahoo Finance. Follow her on X @LauraBratton5.

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