ASML shares plunge amid regulatory headwinds and valuation concerns

ASML, Europe's largest tech firm, has been one of the worst performers in the Pan-Euro Stoxx 600, with its shares plunging 24% in the third quarter.

The decline was primarily driven by regulatory restrictions, particularly export curbs to China.

Furthermore, global trends have seen funds shift away from AI stocks into sectors more likely to benefit from a lower interest rate environment, intensifying valuation concerns and putting additional downward pressure on ASML's shares.

Despite this, ASML shares are still up 8.6% year-to-date and have risen 32% over the past year.

Regulatory hurdles

ASML is heavily reliant on the Chinese market, and like many semiconductor stocks, it has suffered from the Biden administration's restrictions on chip exports to China.

In the second quarter, the Dutch chip equipment maker reported strong earnings, with sales in China contributing 49% of its overall revenue for the first half of the year, up from a 39% market share in the final quarter of 2023.

However, on the same day, the US announced stricter export curbs on China, leading to a sharp decline in semiconductor stocks. This news caused ASML shares to tumble by 11%.

Sales in China could be impacted by US export restrictions aimed at limiting China's ability to advance its technology for military purposes, a move framed as addressing "national security" concerns.

The Biden administration has imposed more restrictive trade policies on companies like ASML, which have continued to supply China with older generations of computer chips used in cars and appliances.

The US may impose direct controls on foreign-made products using even minimal amounts of American technology.

Last month, the Dutch government imposed further restrictions on ASML's chip exports to China, in collaboration with the US.

Under the new policy, ASML must obtain a licence to provide spare parts and software updates for computer chip-making equipment to China.

These new restrictions are in addition to the curbs already imposed by the Dutch government last year, amid growing geopolitical tensions arising from the war in Ukraine.

ASML's CEO, Christophe Fouquet, has stated that while he expects further pressure for restrictions, he also anticipates increased "push-back" against these measures, speaking at a conference in New York.

Artificial intelligence stock hype

As the US Federal Reserve begins its easing cycle with a substantial 0.5% rate cut, investment funds appear to be rotating away from overhyped AI stocks towards sectors more sensitive to interest rates, such as utilities and real estate on Wall Street.

Meanwhile, China's extensive stimulus package has boosted liquidity in the country, redirecting funds towards infrastructure and growth-sensitive assets, including luxury consumer stocks and large mining shares.

Technology shares, particularly those related to artificial intelligence (AI), experienced a notable pullback in the third quarter. The iShares Semiconductor ETF dropped 9% in US markets, while the Euro Stoxx 600 technology sector fell by 17% over the last three months, in contrast to a 4% rally in the S&P 500 and a 1% growth in the Euro Stoxx 600.

Earlier in September, UBS analysts downgraded ASML from "buy" to "hold" amid concerns over its valuation.

The investment bank believes the Dutch firm is likely to face a slowdown in growth by 2025 due to weakening demand for its high-end chip-making machines, which has resulted in overcapacity.

ASML is due to release its third-quarter earnings in two weeks and will outline its future plans on Investor Day, 14 November. At the event, the tech giant will provide an overview of the industry outlook and its product strategy.