ASML shakes up the chip sector: What investors need to know? (10/17/2024)

Hello, everyone! This week, we will turn our attention to $ASML Holding (ASML.US)$, the Dutch company renowned for producing extreme ultraviolet (EUV) lithography machines critical for advanced semiconductor manufacturing. Recently, ASML surprised the market with a disappointing earnings report. In this article, we'll explore the latest trends and examine the company's recent market activity.

What's new?

On Tuesday, October 15, 2024, ASML accidentally published its third-quarter results on its website a day early due to a technical error. The most significant takeaway from the report was ASML's disappointing outlook.

The company now expects total net sales for 2025 to be between 30 billion and 35 billion euros, below analysts’ consensus estimate of 35.8 billion euros, according to FactSet. This guidance sparked a widespread selloff, with ASML stock plummeting 16% on Tuesday, which in turn dragged the entire semiconductor sector down by approximately 5%.

CEO Christophe Fouquet explained that the decline in the global semiconductor market is primarily due to reduced demand from the automobile and consumer electronics industries. However, he noted that there are still significant developments and growth potential in the AI space.

During the investor call on Wednesday, ASML's management clarified that the ongoing downturn in the semiconductor market is expected to result in decreased sales of its less-advanced deep UV lithography systems in China. They remain optimistic about AI, emphasizing that the market would be very sad without it and that they continue to view AI as a promising opportunity.

ASML's results illustrate that the AI trend is unfolding without a corresponding uplift in the PC and smartphone markets. This pattern is likely to persist for several quarters, as companies redirect their IT budgets and expenditures towards initiatives that enhance productivity, particularly AI servers equipped with advanced GPUs.

Chart of the day

Trend analysis:

ASML has seen a remarkable upward trajectory since October 2022, with its stock price tripling and peaking at $1,108 in July 2024. However, since that peak, the stock has retraced more than 50% of its prior gains, a trend clearly illustrated by the Fibonacci retracement tool on the weekly chart.

On the daily chart, ASML is currently on a downward trajectory, having declined more than 37% from its closing high on July 10. This recent drop has been exacerbated by a two-day consecutive sharp decline following its Q3 results, which have driven the stock to a ten-month low.

Technical indicators:

● ASML is currently trading below its key moving averages (MAs), including both the 50-day and 200-day MAs. The recent steep decline below the 50-day MA signals a bearish reversal in market sentiment.

● While the price has established lower lows, the MACD oscillator has shown higher lows, signaling a bullish divergence. This suggests underlying strength and signals a potential short-term shift in trend direction toward the upside.

● The RSI indicator suggests a potential oversold condition, as it approaches the critical oversold threshold of 30.

● Trading volume has dramatically increased in the wake of ASML's Q3 earnings report, highlighting a notable rise in selling pressure and heightened market anxiety.

In summary, ASML's short-term market sentiment has weakened following its Q3 earnings report, marked by two consecutive days of market sell-offs. For proactive traders, there are early indications suggesting a potential price rebound in the near term. Conversely, more conservative traders may prefer to wait for clearer signals, such as a return of trading volume to more typical levels, before making any decisions.

This presentation discusses technical analysis, and other approaches, including fundamental analysis, may offer very different views. The examples provided are for illustrative purposes only and are not intended to be reflective of the results you can expect to achieve.

All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.