Chip makers and suppliers slide as U.S. said to consider new export restrictions

Shares of ASML (ASML) sank despite the company reporting strong orders in the second quarter. The reason behind might be its surging sales to China, which accounted for nearly half of the Dutch company’s revenue, amid reports saying the Biden administration has told allies it is considering using the most trade restrictions available if companies continue giving China access to advanced semiconductor technology.

The news on potentially tougher trading curbs also sent several chip maker and supplier names into negative territory, including AMD (AMD), Nvidia (NVDA), Broadcom (AVGO), Qualcomm (QCOM), Marvell (MRVL), Micron (MU), and TSMC (TSM).

TOUGHER TRADING CURBS: The Biden administration is considering a wide-sweeping crackdown to clamp down on companies exporting their chipmaking equipment to China if companies such as Tokyo Electron (TOELY) and ASML continue giving the country access to advanced semiconductor technology, Bloomberg’s Mackenzie Hawkins, Ian King, Cagan Koc, and Takashi Mochizuki report.

According to people familiar with the matter, the U.S. is considering whether to impose a measure called the foreign direct product rule, which lets the country impose controls on foreign-made products that use even the tiniest amount of American technology.

ASML RESULTS: ASML reported second quarter EPS of EUR 4.01 and revenue of EUR 6.24B , versus EUR 3.11 and EUR 5.29B last year, respectively. The company also reported Q2 net bookings of EUR 5.57B. “While there are still uncertainties in the market, primarily driven by the macro environment, we expect industry recovery to continue in the second half of the year. We expect third-quarter total net sales between EUR 6.7 billion and EUR 7.3 billion with a gross margin between 50% and 51%. ASML expects R&D costs of around EUR 1,100 million and SG&A costs of around EUR 295 million. Our outlook for the full year 2024 remains unchanged. We see 2024 as a transition year with continued investments in both capacity ramp and technology. We currently see strong developments in AI, driving most of the industry recovery and growth, ahead of other market segments,” said ASML president and CEO Christophe Fouquet.

PULLBACK COULD BE BUYING OPPORTUNITY: Wolfe Research notes ASML posted solid Q2 bookings and maintained full year 2024 guidance, which the firm thinks sets up for a strong second half of 2024 and 2025. The stock is, however, down on the report, which Wolfe attributes to two reasons. One concern relates to the Q3 revenue guide coming in slightly below consensus, but the firm thinks that’s simply a function of timing. The other relates to reports of additional pressure from the U.S. government regarding China restrictions.

According to news reports, Washington is seeking to restrict service on restricted tools, for which U.S. companies are already restricted but ASML is not. Wolfe notes Washington is seeking leverage via the foreign direct product rule. But its initial interpretation is that the goal is to restrict service, not to further restrict older immersion tools. If the firm’s interpretation is correct, this too would represent noise, since China services are a small part of revenue. Wolfe’s first reaction is to buy ASML on the pullback. The firm has an Outperform rating on the shares with a price target of EUR 1,050.

PRICE ACTION: In morning trading, shares of ASML have dropped over 10% to $959.49. Also lower, Nvidia and Broadcom have slipped about 5%, AMD has slid almost 8%, Qualcomm, TSMC and Marvell have dropped 6%, and Micron almost 4%.

Of note, Intel (INTC) had gained almost 5% to $36, while Texas Instruments (TXN) and Microchip (MCHP) have advanced about 2% to $210.45 and $96.67, respectively.