Following the news that ASML reported strong Q3 2022 results;

Josep Bori, Thematic Research Director at GlobalData, a leading data and analytics company, offers his view:

“ASML’s solid Q3 2022 results are creditable given the current sector backdrop. However, they also highlight the costs and risks of the US bans on chip technology exports to China for leading semis vendors, which pursued that growth market for years with the acquiescence of the US. This is bound to be in the minds of management as they head into the next ASML Investor Day in early November, where they may revise their current 2025 revenue target and possibly their 2020–30 growth target. While they may stick to long-term targets, they will be back-end loaded as 2023 is bound to be weaker than expected when the targets were originally set.

“Despite revenue growth decelerating in Q3 and somewhat soft guidance for Q4, the company remains very well positioned. Its extreme ultraviolet lithography (EUV) machines, capable of manufacturing the smallest chips (i.e., 7, 5, and soon 3-nanometer nodes), accounted for 51% of total system sales in Q3, up from 26% in Q1. Further, its demand remains robust, and the net bookings growth of 44% year-over-year bodes well for future sales. Moreover, this manufacturing technology leadership places ASML front and center of any country’s artificial intelligence (AI) strategy, as advanced AI chips require this miniaturization level.

“However, investors are likely to be concerned about ASML’s business in China from two perspectives. The drop in system sales to China from a 34% contribution in Q1 to 15% in Q3 is a significant worry. It is compounded by the fact that the slack seems to have been picked up by Taiwan rather than the US and EMEA. Given the increasing sabre rattling from the Chinese Communist Party, which is currently celebrating its 20th National Congress, it does not seem that shifting manufacturing capacity from China to Taiwan is any safer for ASML.

“Arguably, investors’ concern about the softening of chip demand post-COVID as we likely enter into a global recession is significantly more predictable and manageable than the escalating US/China trade dispute. The results suggest ASML is complying with the US bans on semis technology exports to China. However, the fundamental question in the coming months is how the likes of TSMC, Samsung, and Canon will react to broader restrictions on the export of advanced chips and tools to China that was announced two weeks ago. Remaining neutral will become increasingly difficult for companies based in Taiwan, South Korea, the Netherlands, or Japan, despite the significant economic costs of not doing so.

“As the flare of geopolitical tension in early August following Nancy Pelosi’s visit to Taiwan demonstrated, the US export bans on chip technology transcends the semiconductor industry. In GlobalData’s view, this is about AI dominance, which underpins what many call the fifth industrial revolution, and, ultimately, about global economic leadership in the next few decades.

“GlobalData’s report, ‘Artificial Intelligence (AI) Chips – Thematic Research’, predicts that the accelerating adoption of AI in commercial and military use cases will drive the global AI chips revenue at a compound annual growth rate of 30% from $12 billion in 2021 to $130 billion in 2030.”