Pain or Gain Ahead of Semiconductor ETFs?

Chip stocks took a hit on Apr 17, 2024 following ASML Holding's ASML – a world leader in the manufacture of advanced technology systems for the semiconductor industry – announcement of a steep decline in bookings during the first quarter, catching investors off guard.

Shares of ASML – as the primary supplier of equipment for advanced chip manufacturing – slumped 7.1% in the key trading session on Apr 17, 2024. The news acted as a cornerstone for the entire semiconductor industry. Leading chip companies – AMD, Nvidia, Intel, and Qualcomm – all experienced drops in their stock prices, with Arm suffering the most significant decline of nearly 12%.

The news is crucial for the chip industry as ASML’s key customers include TSMC, Samsung and Intel, the world’s top processor foundries, which, in turn, make chips for AMD, Nvidia, Qualcomm and Apple, per CNBC. The company’s top two customers made up over half of its 2023 sales. Sales were down in Taiwan and South Korea, where TSMC and Samsung are based, respectively.

Semiconductor ETFs like VanEck Semiconductor ETF SMH, Invesco Semiconductors ETF PSI and iShares Semiconductor ETF SOXX each lost about 3% on Apr 17.

Inside ASML’s Downbeat Earnings

Despite posting a net profit of 1.22 billion euros, surpassing expectations, ASML's net sales of 5.29 billion euros fell short of the anticipated 5.39 billion euros.The decline in net sales by 21.6% year-on-year and net income by 37.4% weighed on investors’ sentiments.

Totaling 3.6 billion euros in the first quarter, ASML's net bookings for machinery reflected a 4% decrease year-on-year and a significant drop from the previous quarter. This decline was attributed to weakened demand for consumer electronics, impacting chipmakers globally, including ASML.

The decline in bookings for manufacturing equipment triggered concerns about a likely downturn in the semiconductor industry. However, CEO Peter Wennink anticipates a stronger second half of 2024, attributing the current challenges to a transitional phase in the industry. Despite economic headwinds and cautious ordering from customers, ASML anticipated net sales for 2024 to be similar to the previous year.

Is AI Investment Trends on Declining Momentum?

In 2023, the global investment in AI recorded a consecutive decrease, according to a report from Stanford's HAI, as quoted on TechCrunch. Both private and corporate investments in AI witnessed a slump compared to the previous year, showing signs of diminishing enthusiasm. Slower-than-expected growth, technical challenges, and a maturing investment landscape have been held responsible for this decline.

Valuation Concerns

Most of the industry-leading chip stocks carry high valuations. This is another reason for their recent slump. For example, ASML has a P/E of 45.42X versus an industry P/E of 28.72X. Nvidia has a P/E of 67.40X versus an industry P/E of 26.53X. 

Any Ray of Hope?

Anticipated Recovery and Future Orders

Amidst the challenges, ASML expects increased orders from companies like Intel and TSMC for lithography machines later this year. ASML's optimism was further buoyed by increased production capacity among major chip manufacturers, supported by initiatives such as the U.S. CHIPS and Science Act.

Generative AI: Still A Bright Spot Amid the Downturn

Despite the overall slowdown in AI investment circles, generative AI — which creates new content like text, images, music, and videos — has emerged as a rising star. Funding for generative AI startups surged in 2023, indicating sustained interest in this segment. However, there are concerns about whether generative AI can deliver on its promises of efficiency gains and meaningful revenue gains.

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ASML Holding N.V. (ASML) : Free Stock Analysis Report

Invesco Semiconductors ETF (PSI): ETF Research Reports

VanEck Semiconductor ETF (SMH): ETF Research Reports

iShares Semiconductor ETF (SOXX): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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