ASML, a Dutch designer and manufacturer of cutting-edge and bleeding-edge lithography systems, lost 16% of its market cap in the hours following the accidental leak of its lower-than-expected Q3 2024 earnings.

It remains the only company in the world with the technological know-how to produce and sell extreme ultraviolet lithography (EUV) machines that can make bleeding edge 5nm, or even 3nm, chips.

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Is the decline in its stock price simply a temporary shift in market sentiment, or is it a sign of things to come?

Forward guidance showed that ASML’s 2025 sales forecasts came out far lower than analysts had been led to believe throughout the year. ASML now also expects its China sales to decline, having historically accounted for around half of its revenue.

This news flash gave ASML’s stock its worst day in 26 years. However, fears over ASML’s performance started materialising even before this. Since mid-July 2024, ASML’s stock has lost around 34% of its value.

ASML’s natural monopoly

There are two possible explanations for this. One is that ASML’s natural monopoly in bleeding-edge chip production gear makes it susceptible to stronger market shocks when sentiment shifts. The other relates to the tension between the US and China.

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Since 2019, ASML has been restricted from selling its most advanced EUV tool line to China, as a result of a US-led campaign to slow Beijing’s technological advancement, which the US views as a national security threat.

Reports surfaced in March 2024 that the Dutch government had started slowing the issuance of licenses for ASML to provide maintenance services to certain lithography machines in China. If ASML is forced to take a hardline stance on this in the future, it will effectively render all ASML-branded lithography machines useless in China as soon as they run into a minor problem.

Kill switches

Furthermore, reports surfaced in May that ASML has explored the idea of implementing “kill switches” in its EUV machines. These switches would essentially turn all ASML-branded EUV machines into furniture if they are acquired by uninvited guests.

News also broke in July 2024, that the president of the Eindhoven University of Technology, a top Netherlands university and key pipeline for ASML’s talent, was questioned last year by the US ambassador to the Netherlands about the establishment’s high number of Chinese students.

The Biden administration is also considering using what is called a foreign direct product rule (FDPR) if ASML continues to sell advanced chip technology to China. The FDPR is a severe trade provision, essentially stipulating that if a product was made using American technology, the US government has the power to stop it from being sold, including products made in a foreign country.

What does the future hold for ASML?

The tech world’s current fixation on artificial intelligence (AI) has accelerated the need for high-performance computing and has placed enormous pressure on computer hardware designers and manufacturers.

Paramount among this is the demand for cutting-edge computer chips, causing analysts to double down on using the semiconductor industry as a signal for the future of AI.

The fact that concerns around the sales of one machine can cause such a large decline in market cap shows just how important ASML is for bleeding-edge tech.

ASML will likely be caught between the US and China for the foreseeable future.

A falling China revenue share is a valid cause for concern

Due to pressure from the US, the Netherlands is now looking to prevent China from accessing deep ultraviolet (DUV) machines (second-tier, below EUV), to which China has threatened to cut ASML off completely. A falling China revenue share is a valid cause for concern, but to make matters worse, it is still unknown whether other regions can make up for this shortfall.

The long-standing narrative around EUVs is that most companies can’t afford them. Once a relatively limited audience has adopted them, sales and bookings will inevitably slow. In response, ASML has spoken about the development of several new fabs from companies like TSMC and Samsung as reasons for better-than-expected EUV sales.