Does the ASML Stock Sell-Off Signal Trouble for Nvidia and Broadcom?

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On July 16, shares of ASML (the company) dipped more than 11% at one point during trading, eventually closing with an 8.3% decrease. Despite this, the stock experienced further declines in the following days and has now dropped by approximately 21% over the past year.

The company is responsible for creating sophisticated lithography machines, which chip manufacturers like Nvidia (NVDA) and Broadcom (AVGO) utilize to fabricate their chips. ASML’s extreme ultraviolet (EUV) systems offer a record-breaking number of transistors per silicon wafer, boosting precision and reducing manufacturing expenses. These machines serve as the driving force behind the artificial intelligence (AI) evolution.

Let me share some insights regarding the recent ASML stock drop and discuss potential impacts that might lead to a decline in the record highs of Nvidia and Broadcom.

This way, we can explore the possible consequences for these tech giants following the sell-off of ASML shares.

ASML’s solid results were overshadowed by its guidance

Just recently, on July 16, I was thrilled to learn about ASML’s remarkable second-quarter performance! They’ve projected a whopping 15% revenue growth and a slight bump in gross margins for the entire year. As a semiconductor equipment enthusiast, this news is music to my ears!

What’s even more exciting is that ASML has stood firm with its 2030 objectives. These projections indicate a significant jump in revenue, from the current 28.3 billion euros ($32.81 billion) in 2024, all the way up to between 42.5 and 50.96 billion euros!

Moreover, they’re aiming for a substantial improvement in their gross margin, pushing it from the current low 50% range, up to an impressive 56% to 60% by 2030. This growth trajectory is truly inspiring and I can’t wait to see what the future holds for ASML!

It seems that the growth in the company’s profit margins is probably connected to an expected rise in the number of Extreme Ultraviolet (EUV) machines they’ll be selling. At present, their traditional and less sophisticated deep ultraviolet (DUV) machines account for most of their new sales. ASML generates a substantial portion of its income by maintaining existing machinery for its clients. The shift in the sales mix towards more costly EUV machines, particularly the approximately $400 million high-powered high-numerical aperture (high-NA) versions, is expected to boost profit margins.

In the here and now, the immediate outcomes and the long-term goals set for 2030 aren’t my main concern. Instead, it seems there’s a cloudy, uncertain picture when looking at the mid-term future. ASML has pointed out geopolitical difficulties and economic forces that are impacting their clientele and the timing of their expenditure. (First person perspective)

The business experiences immediate impact due to customs duties on goods imported for its U.S. factories and service facilities. Moreover, ASML acquires parts globally to assemble its equipment, making its supply network intricate and susceptible to tariff changes.

Despite being based in the Netherlands, ASML’s trade relations with the U.S. are tight, which restricts its sales of sophisticated semiconductor lithography systems to China due to increasing demand. Currently, ASML is only allowed to sell its more advanced systems to China on a limited basis, offering older, less expensive models instead.

Besides the direct impact, tariffs may indirectly trigger a significant industry-wide downturn and a change in consumer attitudes. Due to this ambiguity, ASML has stated they can’t guarantee growth in 2026. This uncertainty might be causing the stock price to decrease.

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Nvidia and Broadcom operate upstream of ASML along the AI value chain

The recent financial report and remarks by ASML’s management serve as a reminder that the semiconductor industry is subject to cyclical fluctuations. Excitement and investment in AI notwithstanding, economic downturns can still occur due to geopolitical or macroeconomic factors such as tariffs, trade policies, interest rates, and the timing of the investment cycle.

It might be premature for investors of Nvidia and Broadcom to fret, given that ASML operates on an entirely distinct sales timeline compared to these companies. In their latest quarter, ASML only sold 76 new lithography units, which averages out to less than one sale per day. Finding a corporation with a market capitalization of around $290 billion and such minimal order volume would be challenging. Yet, this underscores the complexity and advanced nature of ASML’s technology. The company essentially controls the market, and clients are prepared to pay a premium for their equipment because it proves cost-effective and precise in the long term. However, due to their high price tag, it is simpler for significant customers to postpone a purchase by a year or two to wait for more advantageous circumstances.

Just recently, ASML announced that a significant portion of their latest quarter’s system sales were distributed across various regions. Specifically, approximately one-third (35%) went to Taiwan, followed by China with around a quarter (27%), South Korea claiming about one-fifth (19%), and the United States accounting for around one-tenth (10%). The remaining 9% were spread across other locations. Given these numbers, it’s safe to say that a large portion of those Taiwan sales likely ended up with Taiwan Semiconductor Manufacturing Company Limited (TSMC), while South Korea’s share probably went to Samsung Electronics Co., Ltd. (SSNL.F). As for the United States, it’s reasonable to assume that the majority of their sales were directed towards Intel Corporation (INFC).

Both Nvidia and Broadcom have sales that extend beyond national borders. However, their sales processes differ significantly from each other as they don’t simply sell large, high-priced items every quarter. Instead, Nvidia generates the majority of its revenue by selling graphics processing units (GPUs), software, and related infrastructure to create AI environments for large tech companies known as hyperscalers. Companies like Microsoft (MSFT) are currently generating a lot of free cash flow and investing heavily in AI initiatives, which in turn benefits Nvidia.

Broadcom is witnessing rapid expansion in its AI chip sales due to demand from hyperscalers. However, it’s important to note that Broadcom’s portfolio extends beyond AI, encompassing areas such as network connectivity, cybersecurity, broadband, wireless technology, and infrastructure software as well.

Both Nvidia and Broadcom have business operations across various countries and are susceptible to trade disputes and tariff concerns. However, unlike ASML, their sales patterns differ significantly. Consequently, ASML’s forecast of a potential downturn may not directly apply to Nvidia and Broadcom. Nevertheless, if semiconductor manufacturing facilities (fabs) reduce their spending on investments, it might result in an accumulation of inventory, potentially causing delays in chip designers’ shipments.

Zooming out in the semiconductor industry

The drop in ASML’s share price is primarily due to short-term projections, not indicative of its value as a long-term investment. When it comes to chip stocks like Nvidia and Broadcom, which often have high valuations, it’s advisable to adopt a long-term perspective, ideally for at least three to five years.

If you’re convinced about the future expansion of worldwide interconnectedness and artificial intelligence, and you think Nvidia and Broadcom will continue to dominate their industries, then it’s likely that these stocks are worth purchasing and keeping in your portfolio. Periods of poor earnings performance may occur now and then, but over the long term, the investment theory should unfold, making up for any temporary losses.

In other words, when stock prices rise faster than earnings growth and create high valuations, they may inflate like balloons filled with hot air, which could burst easily. Thus, it’s crucial to adopt a cautious mindset when investing in such stocks because geopolitical and economic events can significantly influence their short-term prices.

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2025-07-24 02:20