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Semiconductor companies, including ASML (ASML) and Applied Materials (AMAT), could potentially be facing a new round of export restrictions to China from U.S. lawmakers. This time, officials seem to be targeting wafer fabrication equipment (WFE) exports to China. The House Select Committee on the Strategic Competition Between the United States and the Chinese Communist Party recently addressed letters to ASML, AMAT, and more semiconductor companies, seeking details about their sales to China.
According to Bernstein Societe Generale Group, potential restrictions could jeopardize up to 50% of China WFE. “Our estimate for China WFE spending is $43B in 2024 and $41B in 2025, representing 36% of global WFE in 2025,” said Bernstein analysts, led by David Dai, in a Nov. 12 note. “Of China’s total WFE spending in 2025, we estimate that 15% is DRAM, and 36% is advanced logic; hence half of China’s WFE is at high risk from a potential restriction.”
At the same time, Dai noted, “Depending on the specific measures of restriction, another round may not materially impact China's overall purchase of WFE.” Bernstein suggested that if and when new WFE export restrictions to China are announced, it could create a buying opportunity for these stocks.
Let’s take a closer look.
The Case For ASML Holding N.V. Stock
ASML Holding N.V. (ASML), headquartered in the Netherlands, is a global leader in producing advanced technology systems for the semiconductor industry. The company provides a comprehensive portfolio for manufacturing complex integrated circuits (ICs). ASML designs, develops, integrates, markets, and services advanced systems utilized by major semiconductor manufacturers worldwide. These systems are essential for producing chips that power a diverse range of electronic, communications, and information technology products. ASML currently has a market capitalization of $259.1 billion.
ASML holds a dominant position in the global lithography market, commanding an 80% market share. It supplies its Extreme Ultraviolet (EUV) lithography machines to leading semiconductor manufacturers such as Taiwan Semiconductor Manufacturing Company (TSM), Intel (INTC), and Samsung.
Still, ASML stock has fallen 13% year-to-date, impacted by geopolitical risks and the cyclical nature of the industry.
The China Risk
ASML is subject to significant geopolitical risks, given its substantial exposure to China. Notably, ASML’s sales of its advanced EUV machines to Chinese clients hinge on regulatory approvals, and stricter export controls could restrict its access to this crucial market.
On Nov. 8, ASML, KLA Corp. (KLAC), Applied Materials, Lam Research (LRCX), and Tokyo Electron were sent letters by lawmakers from the House Select Committee on the Chinese Communist Party concerning their operations in China. Chairman John Moolenaar and Ranking Member Raja Krishnamoorthi wrote the letter, expressing concerns that the semiconductor equipment companies could inadvertently provide the People’s Liberation Army with the means to develop advanced processors and bolster China’s domestic chip capabilities.
The decline in revenue from China was a topic of discussion during ASML's Q3 earnings call. Management now forecasts that it will drop to 20% of total revenue in FY25, consistent with current bookings. Roger Dassen, ASML’s Executive Vice President and Chief Financial Officer, said, “We also now expect our China sales to be around 20% of our total revenue next year, trending back towards our historical China percentage and in-line with its share of the backlog.”
This represents a significant reduction, considering that revenue from China constituted 47% of ASML’s total revenue in the third quarter of 2024. Consequently, ASML is unlikely to increase its revenue as rapidly as it has in recent years. Moreover, a new wave of chip export controls on WFE could further impact its business, intensifying pressure on its top-line growth rates.
How Did ASML Perform in Q3?
On Oct. 15, ASML’s stock tumbled more than 16% after the company released its third-quarter financial results and outlook. Notably, ASML inadvertently released its earnings a day earlier than scheduled.
Its total net sales increased by 20% quarter-over-quarter to 7.47 billion euros, surpassing the upper range of its guidance, fueled by increased sales of DEEP UV systems and higher installed base management sales. The top line figure surpassed the Bloomberg consensus estimate of 7.17 billion euros. More precisely, net system sales stood at 5.9 billion euros, consisting of 2.1 billion euros from EUV sales and 3.8 billion euros from non-EUV sales. Net system sales were primarily driven by logic, accounting for 64%, while the remaining 36% stemmed from memory. Also, Installed Base Management sales for the quarter exceeded guidance, reaching 1.54 billion euros, driven by increased service and upgrade revenue.
ASML’s gross margin for the quarter fell within the guidance at 50.8%. Also, the company’s net income climbed 32% quarter-over-quarter to 2.08 billion euros, exceeding estimates of 1.91 billion euros. Its basic earnings per share were 5.28 euros, up from 4.01 euros in the second quarter.
Net bookings, a key indicator of future revenue, dropped 53% quarter-over-quarter to 2.63 billion euros, falling well short of the consensus estimate of 5.39 billion euros. Management attributed this “relatively low level” to the sluggish recovery of traditional end markets and customers’ cautious approach in the current environment. ASML finished the quarter with a backlog of over 36 billion euros.
Turning to the balance sheet, ASML holds approximately 5 billion euros in cash and equivalents compared to $4.7 billion in long-term debt. This amount of debt is quite modest, especially in relation to the company’s market capitalization. Similar to many semiconductor companies, ASML maintains a strong balance sheet.
Looking ahead to Q4, the company anticipates revenue of about 9 billion euros, which includes revenue recognition of two high-NA systems installed in 2024. Also, management forecasts net sales of around 28 billion euros for the full year.
However, the post-earnings selloff was primarily driven by a narrower revenue guidance range for FY25. ASML revised its net sales forecast to a range of 30 billion euros to 35 billion euros, down from its previous estimate of 30 billion euros to 40 billion euros. Although the revision is not positive, the midpoint projection for FY25 revenue is still 16% higher than the expected revenue level for FY24. Also, the company expects an FY25 gross margin of 51% to 53%, revised down from the previously expected 54% to 56%.
“This revised guidance for 2025 is coming somewhat earlier than we expected, but doesn’t change our view that 2026-2027 remains challenging,” said UBS analyst Nicolas Gaudois in a note.
Valuation, Dividend, and Analysts’ Estimates
Analysts tracking the company predict a 7.41% year-over-year drop in its EPS to $20.04 for fiscal 2024. Also, Wall Street expects ASML’s full-year revenue to decline 1.65% year-over-year to $29.49 billion.
In terms of valuation, the stock is currently trading at 32.86 times the consensus earnings estimate for FY24, which is about 36% higher than the sector median of 24.20x. However, the multiple remains below its five-year average of 40.01x. I believe the current valuation is reasonable, given the company’s long-term growth potential, despite short-term challenges like exposure to China and market underperformance.
It should also be noted that ASML pays dividends. The current yield stands at a low 1%, yet the dividend is increasing quickly. ASML boasts a 10-year dividend compound annual growth rate (CAGR) of 23.05%, well above the sector median of 9.84%. Moreover, its payout ratio is quite low at 10.22%, indicating substantial room for further dividend growth. Notably, the company did not purchase any shares under its ongoing 2022-2025 share buyback program during the third quarter.
What Do Analysts Expect For ASML Stock?
Despite short-term challenges, analysts remain positive about ASML Holdings stock, as evidenced by its “Strong Buy” consensus rating. Out of the 20 analysts offering recommendations for the stock, 16 recommend a “Strong Buy” and the remaining four maintain a “Hold” rating.
The mean target price for ASML stock is $908.38, which is about 38% above Friday’s closing price.
The Case For Applied Materials Stock
With a market capitalization of $139.2 billion, Applied Materials (AMAT) is a prominent global player in the semiconductor industry. AMAT manufactures a range of equipment and provides services to chipmakers, particularly foundries. These products allow customers to produce cutting-edge chips on a large scale. AMAT’s prominent customers comprise a list of top global chip industry leaders, including TSMC, Nvidia (NVDA), Intel, and Samsung, among others.
Shares of the semiconductor equipment maker have gained 4.2% on a year-to-date basis.
The China Risk
China, along with other foundries and IDMs, relies on advanced equipment from the WFE sector to manufacture chips for use in artificial intelligence (AI), 5G technologies, and other applications. The possibility of export restrictions and tariffs between the U.S. and China could affect AMAT’s market opportunities in the country. According to Bernstein, Applied Materials could see a revenue risk of 5% to 17% next year due to potential restrictions on WFE exports to China.
Already, the company witnessed sluggish growth in China during the fiscal fourth quarter, as revenue fell 28% year-over-year to $2.14 billion. As a result of this decline, China accounted for about 30% of total revenue, a decrease from 44% in the same quarter the previous year. This drop highlighted a notable weakness in the company’s strategic ability to leverage opportunities in the largest market for semiconductor equipment.
During the earnings call, management mentioned that the Chinese market is now normalizing, and anticipates that the China mix will remain at 30% in FQ1. AMAT’s core business in China includes Internet of Things (IoT), Communications, Automotive, as well as Power and Sensors, which are highly cyclical sectors in the country.
AMAT Slips on Disappointing FQ1 Revenue Guidance
Last Friday, AMAT stock plunged over 9% as the company’s weak FQ1 revenue guidance overshadowed its better-than-expected FQ4 results.
Overall, the company had a strong quarter, achieving record revenue and earnings per share, generating healthy operating cash flow, and returning value to shareholders through dividends and share repurchases. AMAT’s net sales reached a record $7.05 billion in FQ4, an increase of nearly 5% year-over-year, fueled by strong growth in the Semiconductor Systems and Services segments. Semiconductor Systems sales, making up 73.5% of total revenue, grew 6% year-over-year to $5.18 billion, driven by leading-edge foundry-logic demand. Also, the Applied Global Services segment delivered record revenue of $1.64 billion, an 11% increase year-over-year, fueled by robust growth in services, although partially tempered by a decline in 200-millimeter equipment sales. As a result, the top line exceeded Wall Street’s expectations by $80 million. Looking forward, AMAT is poised to benefit from significant growth tailwinds from AI and energy-efficient computing.
In terms of profitability, the adjusted gross margin reached 47.5%, marking a slight increase from both the previous year and the preceding quarter. This improvement was driven by a favorable mix and operational enhancements, which helped mitigate the impact of reduced revenue from China. AMAT's adjusted EPS reached a record $2.32, up 9% year-over-year, supported by higher gross margin, increased interest income, a lower effective tax rate, and share repurchases. The bottom line figure was also ahead of expectations by $0.13.
Turning to the balance sheet, AMAT upholds its strong financial position with an “A” credit rating from S&P, bolstered by a negative net debt balance. The company ended the quarter with $8 billion in cash and cash equivalents and $6.3 billion in debt. It generated $2.6 billion in cash from operations, up from $1.6 billion in a year-ago quarter.
The primary driver of the post-earnings sell-off was the company’s conservative revenue guidance for the current quarter. Management anticipates FQ1 revenue to range from $6.75 billion to $7.55 billion, with a midpoint of $7.15 billion, slightly below the $7.25 billion estimate. Its adjusted EPS is projected to be between $2.11 and $2.47, with a midpoint of $2.29, slightly exceeding the estimate of $2.28.
The Wall Street community also responded unfavorably to the company's guidance, leading analysts from Deutsche Bank, Morgan Stanley, Wells Fargo, BofA, TD Cowen, Needham, and Evercore ISI to lower their price targets on the stock.
Valuation, Dividend, and Analysts’ Estimates
Analysts tracking Applied Materials project a 10.06% year-over-year increase in its EPS to $9.52 for fiscal 2025, with revenue expected to grow 9.21% year-over-year to $29.68 billion.
In terms of valuation, priced at 17.69 times forward adjusted earnings, the stock is trading at a discount compared to the sector median of 24.30x and its five-year average of 18.22x. Finding a company with AI exposure that trades at a discount relative to the sector median is quite challenging. With that in mind, I believe the stock is appealing at current levels, as the valuation perfectly balances long-term growth potential with the risks associated with China.
Although AMAT’s dividend yield is modest at around 1%, it is well-covered with a payout ratio of 17.55%, and features a 10-year CAGR of 13.67%.
AMAT should also be considered a total return stock, given that significant share repurchases represent another method of returning capital to shareholders. The company repurchased $1.4 billion worth of shares in FQ4. As of the end of the quarter, about $8.9 billion was still available under its share repurchase authorization.
What Do Analysts Expect For AMAT Stock?
Despite the China risk and the post-earnings sell-off, analysts continue to rate Applied Materials as a “Moderate Buy.” Out of the 33 analysts covering the stock, 20 recommend a “Strong Buy,” two suggest a “Moderate Buy,” and 11 assign a “Hold” rating.
The average price target for AMAT stock is $231.81, which indicates an upside potential of 37.3% from the stock’s Friday close.
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