ASML’s Q1 Report: A Preview Of Tariff Turbulences Yet To Come
ASML's 2025 sales outlook remains unchanged - for now.
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«The 2-minute version»
🧬 The Chipmaker’s Chipmaker Reduced To a Bargaining Chip: ASML isn’t just in the semiconductor game—it makes the game possible, supplying the machines that power the likes of TSMC and Nvidia. But with China a major customer and the U.S. watching like a hawk, diplomacy might be its most valuable product line. If there’s a tech cold war brewing, ASML’s in the splash zone.
🚥 Tariffs, Tools & Tightropes: ASML delivered solid Q1 numbers but did so while walking a geopolitical highwire thanks to mounting tariff drama. The company is sticking to its full-year guidance, but the world around it is shifting like quicksand. Stability looks more like a hope than a strategy right now.
📉 Bookings Took a Breather: Q1 bookings got chopped nearly in half as ASML digested earlier China orders, turning the backlog into a ghost of its former self. While expected, the slowdown shows just how sensitive the business is to global policy whims. Investors will need nerves of steel (and possibly a seatbelt) over the next few quarters.
🧘 Margins in Warrior Pose: ASML flexed some margin muscle, expanding both gross and operating margins despite all the tariff turbulence. But management also gave a wider guidance range than usual—a quiet admission that things could swing either way. When the margin yogi starts wobbling, you know the floor's moving.
🕵️ Valuation Looks Tempting, But…: The stock may look cheap on paper, but with China building its own tools and global politics feeling like a Netflix thriller, even ASML’s near-monopoly status feels up for debate. Read below to see why we think that setup for ASML looks fragile, at least in the short term.
🎥Let’s Set The Stage
ASML Holdings ASML 0.00%↑, the maker of some of the most advanced semiconductor heavy equipment in the world, took off the wraps of its Q1 CY25 earnings report yesterday.
ASML’s performance through Q1 was an accurate reflection of the volatile uncertainty that the global chip industry is being plagued by in the backdrop of tariff turmoil. ASML makes high-precision lithography tools, which are used by advanced semiconductor fabrication companies such as Taiwan Semiconductor TSM 0.00%↑, who, in turn, manufacture leading-edge chips for their own customers like Nvidia NVDA 0.00%↑ and Apple AAPL 0.00%↑. So with ASML feeding the entire semiconductor value chain, the stakes were quite high for the company heading into its Q1 earnings report yesterday.
Let’s start with the good news first.
Despite the uncertainty in global trade, ASML kept their 2025 sales outlook unchanged versus what was projected at the start of this year.
However, looking forward, the management provided a wide range for its gross margin guidance, giving itself room for error under the evolving policy environment.
Many investors are wondering whether now is the time to take advantage of the 43% drawdown in the stock since its peak.
Well, on one hand, while the forward valuation indeed looks attractive, we believe that it sits at a fragile setup.
In this post, we will explain why.
ASML’s Business Primer & Its China Headwind
ASML Holdings is a Dutch company that manufactures lithography systems that are used to print micro patterns on semiconductor wafers. In technical terms, ASML’s lithography systems are used to print millions of transistors on the wafer, allowing companies like Taiwan Semiconductor to manufacture leading-edge chips like the 2nm chips Taiwan Semiconductor just announced.
ASML’s lithography systems employ a combination of light, including ultraviolet light, and complex optical systems to enable the creation of transistors on these chips. There is no other company on this planet that can demonstrate the precision & innovation that ASML’s lithography systems have, making ASML’s lithography business a near-monopoly. At the forefront of ASML’s lithography systems is its Extreme Ultraviolet or EUV technology that is used to fabricate AI chips.
Broadly speaking, ASML’s lithography systems are used to manufacture two kinds of chips: logic chips, which feature in AI GPUs like Nvidia’s Blackwell, and memory chips, which are seen in the memory products produced by Micron $MU. On the logic side, Taiwan Semiconductor & Intel $INTC are ASML’s biggest customers, whereas on the memory side, Samsung, Micron, and SK Hynix form the core customer base.
Over the past decade or so, most semiconductor supply chains matured as the core base of their supply chains moved to China, and ASML’s supply chain and core customer base were no different. But as AI took control of the innovation narrative in 2022, China’s purchases of ASML’s high-end lithography systems started ramping up, giving the West much cause for concern.
The graph below illustrates exactly why the West is so focused on ASML’s sales to China.
As you can see above, ASML’s sales to Chinese entities have finally begun to normalize after a couple of years of explosive growth from the Chinese markets. Note that this growth in sales to China occurred despite prior restrictions from several NATO-aligned governmental agencies.
Turning our attention to the current environment, ASML continues to walk a thin line where they repeatedly assert that China is an important market and therefore they will continue to sell to China while remaining within the export restriction parameters set by the US.
In ASML’s Q1 report, consolidated sales were €7.7B, or $8.4B, of which sales of its systems were €5.7B, or $6.2B. The rest of the sales usually comes from servicing its existing installed base, which accounts for approximately a quarter of total sales. As noted from Exhibit A, China accounted for a 27% share, down from 36% in the previous year, which might give some relief to management and lawmakers alike.
While management believes China’s share of system sales will eventually settle at ~25%, consensus estimates are projecting slightly higher sales to China of ~28% system sales share, as can be seen below.