(Bloomberg) — Earnings from two chip-industry giants this week are poised to provide an early insight into issues that have punctured investor confidence and sent valuations to multiyear lows.
Taiwan Semiconductor Manufacturing Co. and ASML Holding NV have born the brunt of a broader market selloff, weighed down by both US tariff threats and doubts over future artificial intelligence demand. Chipmaker TSMC is down down roughly 20% this year and chip-equipment maker ASML has fallen 12%.
The rout saw TSMC’s forward price-to-earnings ratio hit a two-year low at one point, while pushing ASML to its cheapest level since the Covid pandemic.
Concern over a potential slowdown in AI demand has intensified after a string of analyst warnings, while the tariff saga has thrown global businesses’ decision making into a tailspin. All that has heightened investor focus on whether the appetite for AI chips can hold up.
“Both ASML and TSMC are quite heavily discounted” and “a lot of risks have clearly been priced in,” said Ben Barringer, a technology analyst at Quilter Cheviot. “But with uncertainty around what tariffs are going to look like for semiconductors, it is hard to see a re-rating without more concrete news to go off.”
While current quarterly earnings should show sales and income increasing sharply at both companies, the focus will be on their earnings guidance amid trade tensions and a worsening macro backdrop. Changes to outlooks are widely expected, while some analysts are bracing for guidance to be withdrawn altogether.
Global semiconductor stocks showed some signs of relief on Monday, after the Trump administration exempted smartphones and other electronic devices from reciprocal tariffs, a win for iPhone maker Apple Inc. and its suppliers, including TSMC. ASML’s chipmaking machines are also excused from extra levies.
But the reprieve is likely to be brief, as the exemptions are temporary and the administration pushed forward with plans for tariffs on semiconductor and pharmaceutical imports by initiating probes on both sectors.
Apart from direct tariffs, the concern is that higher levies across the board will restrain growth, boding ill for a sector that’s highly sensitive to economic cycles. For chips used for AI workloads, even though they remain in hot demand, the question is how much longer that’s going to last.
“The eventual sectoral tariffs will make investing in US-based data centers more risky, and perhaps catalyze a broader slowdown in new data center construction, which further adds to earnings risk of TSMC and the supply chain,” said Morningstar analyst Phelix Lee.
Industry headwinds aside, both TSMC and ASML are struggling with their own issues. Reports over a potential tie-up with the struggling Intel Corp. has clouded the outlook for TSMC, with analysts questioning the strategic merit of the move given the two firms’ differences in business models and tool sets. It also pledged to invest $100 billion in the US, a potential drag on future margins.
For ASML, spending plans at its key client Intel remain in flux, as the American chipmaker has just named a new chief executive. Meanwhile, another top customers, Samsung Electronics Co., faces production challenges in ramping up leading-edge chips.
“Although TSMC and ASML have largely accounted for the impact of global trade tensions in their current cyclical trough valuations, we expect some near-term downside risk to earnings over the next two quarters,” said Gary Tan, a portfolio manager at Allspring Global Investments.
Bullish investors may argue that expectations have already been much tempered in the lead-up to results. The two companies’ tech dominance remains unshaken. ASML’s advanced lithography tools are essential for the making of all cutting-edge chips. TSMC’s foundry services are crucial to Nvidia and Apple’s chips as Intel and Samsung lag behind.
Still, a growing chorus of analysts predicts weakness ahead, and many are lowering their share-price targets. While TSMC had projected mid-20% revenue growth for 2025, JPMorgan reckons the chipmaker will pare that slightly to target low- to mid-20% expansion.
As for ASML, investors expect 2025 guidance remaining intact, while preparing for 2026 revenues to undershoot analysts estimates, a JPMorgan client survey showed. The company could also withdraw its guidance as customers adjust to tariffs, Deutsche Bank AG said.
Nori Chiou, an investment director at White Oak Capital Partners, says chipmakers’ upcoming results “are unlikely to be too bad,” because AI demand is still robust.
“However, the uncertainty around AI demand for next year is rising,” Chiou said. “Policy volatility could impact how the next round of long-term planning gets made, and that’s something worth watching closely.”
Earnings Due Tuesday
–With assistance from Cindy Wang and Jane Lanhee Lee.
More stories like this are available on bloomberg.com
