Is ASML's earnings report the “canary in the AI mine”?

For Q3 alone, the report is acceptable, and as shown below, ASML delivered 11 new EUV systems in Q3, which is 3 more than in the previous quarter. At the same time, the USA is also beginning to contribute more to revenue, which may indicate that the many initiatives to relocate chip production locally to the US are starting to result in increased American revenue.

The big disappointment in ASML’s announcement is not their financial figures or order intake, but their statements regarding 2025.

Before yesterday, the market expected 2025 to be a growth year after a transitional year in 2024, where revenue growth has been close to 0. It was therefore expected that revenue in 2025 would reach around 35 billion EUR, compared to 28 billion EUR in 2024, which represents annual growth of about 25%. However, ASML announced yesterday that they expect revenue of 30-35 billion EUR for next year, and that the expected gross margin for 2025 is 51-53%, whereas the market had previously expected 54%.

The downgrade may not sound dramatic, but given the sky-high expectations for 2025, it is understandable that the stock is hit hard when expectations for 2025 are already being downgraded.

Whether this is a sign of a slowdown in AI growth, and whether this earnings report is the "canary in the AI mine" signaling that it's time to get out, is, as mentioned, difficult to answer, as two different conclusions can be drawn from yesterday's announcement.

The quote from ASML's CFO, Roger Dassen, below, nicely sums up why the report can be interpreted in both directions regarding the development of artificial intelligence.

On the one hand, he mentions that there is still strong development and significant "upside" within the "AI sector", and that it is developments in other microchip markets that are responsible for the lower expectations for 2025 revenue.

On the other hand, he also mentions that it is especially the EUV systems that are experiencing delays due to a change in demand. However, it is precisely EUV systems that are needed to produce, among other things, NVIDIA's next-generation graphics cards or microchips for the latest iPhones. Therefore, this could well indicate that the big tech companies are holding back on buying new machines for chip production due to a potential upcoming slowdown in demand.

"While there continue to be strong developments and upside potential in AI, other market segments are taking longer to recover. It now appears the recovery is more gradual than previously expected. This is expected to continue in 2025, which is leading to customer cautiousness. … leading to several fab push-outs and resulting changes in litho demand timing, in particular EUV."

Although ASML's stock is down over 20% in 24 hours, it is not a catastrophe for the company or the tech sector in general. Yes, it is a big disappointment that sales are not expected to be higher in 2025, as this was expected to be the year when growth truly returned to ASML. As shown below, it was expected, as indicated by the blue line, that revenue would rise to nearly 40 billion EUR by 2026.

Although expectations now need to be adjusted downwards, ASML is still expected to experience decent growth in the coming years, indicated by the orange line.

Yesterday's report was certainly not as good as expected, and possibly this could indicate that overall growth within artificial intelligence is on the decline, but there will still be decent growth in the coming years, even if it may not be as high as initially thought.