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Dutch lithography giant ASML was originally scheduled to release its third-quarter financial report on Wednesday, but due to a technical glitch, the report was prematurely posted on the website during the early hours of Tuesday's US stock market. As a result, the disappointing performance caught the market off guard: although revenue exceeded expectations, orders were only half of the market's expectations, while also lowering sales targets and gross margin guidance for next year.

Key financial data:

Net sales: Net sales in the third quarter were €7.47 billion, a sequential increase of 20%, with analysts expecting €7.17 billion.

Order volume: Orders in the third quarter were €2.63 billion, a sequential decrease of 53%, with analysts expecting €5.39 billion.

Gross margin: The gross margin for the third quarter was 50.8%, with analysts expecting 50.7%.

Net profit: €2.08 billion, a sequential increase of 32%, with expectations of €1.91 billion.

Cash and equivalents: €4.99 billion, a sequential decrease of 0.7%, with expectations of €4.86 billion.

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Performance guidance:

Full-year 2024 net sales: Expected full-year net sales of €28 billion, with analysts expecting €27.71 billion.

Q4 net sales: Expected fourth-quarter net sales of €8.8-9.2 billion, with analysts expecting €8.95 billion.Q4 Gross Margin: The company expects a gross margin of 49%-50% for the fourth quarter, while analysts anticipated 50.5%.

2025 Net Sales: The company forecasts net sales of €30 billion to €35 billion for 2025, down from a previous expectation of €30 billion to €40 billion, with analysts expecting €35.94 billion.

2025 Gross Margin: The company anticipates a gross margin of 51%-53% for 2025, down from an original expectation of approximately 54%-56%.

The company stated that ASML's third-quarter system sales accounted for 47% of the Chinese market, down from 49% in the previous quarter, but still the largest market for ASML. It is expected that the Chinese market will contribute approximately 20% to the company's overall revenue in 2025.

After the financial report was released, ASML's ADR on the US stock market fell more than 17% at one point, eventually closing down 16.26% at $730.43. The company's stock price on the Amsterdam stock market closed down 16%, marking the largest single-day drop since 1998, with a temporary trading halt during the session.

The Nasdaq Composite Index closed down 1.34%, and the Philadelphia Semiconductor Index closed down 5.24%, the largest drop in over a month. Intel closed down 3%, TSMC ADR fell 2.64%, Micron Technology fell 3.7%, NVIDIA closed down 4.53%, AMD fell 5.22%, and Arm Holdings fell 6.89%.

Is the AI bubble about to burst? ASML: AI chip demand remains high, but other parts are problematic.

ASML is the largest technology company in Europe and a leading supplier of chip manufacturing equipment, with customers including AI chip manufacturers TSMC, logic chip manufacturers Intel and Samsung, and memory chip manufacturers Micron and SK Hynix. As a key supplier to many chip manufacturers, ASML's performance is often seen as an indicator of investment plans and prospects in the chip industry.

Just over a month ago, AI leader NVIDIA's CEO, Jensen Huang, stated at the Goldman Sachs Technology Conference in San Francisco, "The demand for chips from AI is enormous, everyone wants to be first, everyone wants to be in a leading position." He added, "Today we may have more emotional customers, which is understandable. It's tense, and we are doing our best."Financial media outlet ZeroHedge suggests that ASML's dismal financial report and downgraded outlook may indicate that the AI bubble is deflating. However, ASML's Chief Financial Officer, Roger Dassen, denied this claim in a statement. The company stated that while demand for AI-related chips has indeed surged, other parts of the semiconductor market have been weaker than expected, leading to logic chip manufacturers postponing orders and memory chip manufacturers only planning for "limited" additional capacity.

"Although the AI sector continues to show strong development and upward potential, the recovery in other market segments is taking longer. At present, it appears that the recovery is more gradual than previously anticipated. This situation is expected to continue into 2025, leading to increased caution among customers. Regarding logic chips, competitive wafer foundry dynamics have led to slower expansion of new nodes for some customers, resulting in multiple fab delays and causing changes in photolithography demand timing, particularly for EUV. In the memory sector, we see limited additional capacity, with the focus still on technology transitions to support the demand for AI-related HBM and DDR5."

ASML's Chief Financial Officer, Roger Dassen, also stated, "Some very specific competitive issues in the chip manufacturing business have led to a slower recovery in those chip markets that have not benefited from the AI boom demand. It is clear that the strong performance of AI continues."

Media reports indicate that over the past two years, artificial intelligence has driven the development of parts of the chip industry, making NVIDIA one of the world's most valuable publicly traded companies. Other chip manufacturers with less connection to the AI boom, such as Intel, have faced more difficulties. In areas of the chip industry that saw a surge in demand during the pandemic, such as automotive and consumer electronics chips, demand has also recently declined.

Therefore, it is analyzed that the recent challenges faced by Intel and Samsung seem to have led to ASML's weak performance. Intel is currently cutting costs by laying off employees and delaying investments in new production facilities, and the company reported disappointing results in August. Earlier this month, Samsung also admitted that the company faces a "crisis" in AI chip manufacturing, and an upcoming downturn in the memory market.Analysts: Still Too Unexpected

For analysts, ASML's downward revision of its performance guidance came as a negative surprise.

Citibank said in a report:

"As recently as early September, ASML's management reaffirmed that the lower end of the 2025 performance guidance forecast range was 'conservative'."

"We are looking forward to obtaining more detailed information on recent changes in demand to understand the impact on ASML's expected downward revision for 2025 and what it means for customers' plans for 2026."

Analyst Michael Roeg from Degroof Petercam Bank said he expected ASML's warning to drag down the entire industry, but he noted that sales for ASML in 2025 are still expected to increase compared to 2024.

"Despite the weakness in the chip end market, equipment demand has not declined."

Bernstein analysts said in a report following ASML's financial report that ASML's downward guidance indicates that "delayed cyclical recovery and challenges from specific customers have significantly affected expectations for 2025."

Meanwhile, Cantor analysts said ASML's pessimistic outlook is "clearly disappointing" and will put pressure on semiconductor stocks. However, the analysts added that "the company's updated outlook by no means implies any change in the AI growth story."