Different fates for the same industry, are chip companies going their own ways?

Last week, $ASML Holding(ASML.US)$ and $Taiwan Semiconductor(TSM.US)$ Both chip giants released their third-quarter Earnings Reports, yet their performances diverged significantly. On October 15, ASML Holding's stock plummeted after its report, dragging down the Semiconductor Sector dramatically; but just two days later, Taiwan Semiconductor delivered a strong performance, reaching a historic high and successfully entering the trillion-dollar club.

ASML Holding is the world's largest producer of lithography machines, providing essential equipment for chip manufacturing. Taiwan Semiconductor, on the other hand, is the world's largest chip manufacturing company, focused on offering advanced process chip foundry services. Both companies possess a wide economic moat and dominant positions in their respective fields. What are the reasons behind the performance disparity? As the AI wave continues to develop, can chip stocks continue to soar?

Different fates in the same industry

From the surface, ASML Holding's third-quarter performance still appears impressive, with key Indicators such as revenue, net profit, and gross margin exceeding Wall Street's expectations. However, there was a significant decline in orders on hand for that quarter. Orders on hand fell sharply to 2.63 billion euros, significantly lower than the market expectation of 5.39 billion euros.

At the same time, ASML Holding also lowered its guidance, adjusting the 2025 net sales from 30-40 billion euros to 30-35 billion euros, and the gross margin guidance from 54%-56% down to 51%-53%. ASML Holding's stock dropped sharply in response, closing down over 16% on the day of the earnings release, and continued to adjust at low levels in the following days.

In contrast, Taiwan Semiconductor's results and guidance both exceeded expectations. The company expects fourth-quarter sales to be between 26.1 to 26.9 billion dollars, with market estimates at 24.94 billion dollars; gross margin is projected to be 57%-59%, compared to the market estimate of 54.7%. Capital expenditures for the full year of 2024 are anticipated to be slightly above 30 billion dollars, and will continue to expand in 2025. Market concerns regarding the chip Industry have eased, allowing Taiwan Semiconductor to set a new historical high.

The contrasting performance mainly lies in the different exposures to the artificial intelligence field.

The management of ASML Holding stated at the earnings call that the demand for AI-related chips is still surging, but other segments of the semiconductor market are relatively weak, dragging down the company's performance.

In comparison, more than half of Taiwan Semiconductor's revenue comes from High Performance Computing (HPC), which includes core product GPUs for foundry. $NVIDIA(NVDA.US)$ The smartphone business, which accounts for more than one-third of the revenue, also saw growth driven by Apple's new device stocking.

Data source: Taiwan Semiconductor. The contents of this chart are for reference only and do not constitute any investment advice. Past performance does not predict future results; the market carries risks and investments should be made cautiously.

Morningstar stated that chip manufacturers like Samsung Electronics have not fully capitalized on the artificial intelligence wave, encountering issues such as poor technology processes and delays in capacity investments, which have impacted ASML Holding's orders. $Intel(INTC.US)$ In contrast, Taiwan Semiconductor is the preferred foundry for AI chips and the only company capable of meeting the growth demand for advanced chips. Despite Taiwan Semiconductor's impressive performance, it remains undervalued.

"Can 'shared glory' be recreated?"

On November 30, 2022, ChatGPT was released. Since then, driven by the AI wave, the entire chip Industry has also experienced a magnificent market. $PHLX Semiconductor Index(.SOX.US)$ Since the release of ChatGPT, the highest increase has exceeded 120%, and as of the close on October 22, it has nearly doubled.

However, during this process, many companies have gradually fallen behind. Besides ASML Holding and Intel mentioned above, some companies that once soared have also shown significant pullbacks. $Super Micro Computer(SMCI.US)$ Last week, NVIDIA and Taiwan Semiconductor both set historical highs, but the PHLX Semiconductor Index still fell by 2.6%.

Whether it's the statements from ASML Holding's management or the differentiated performance within the Industry, these may serve as a reminder for investors: The AI wave has been developing for nearly two years, and while the demand remains strong, not every company in the Industry can benefit equally and come out on top.

Bloomberg reports that the gap between companies that seize AI opportunities and those that fail to fully capitalize on them will continue to widen. From the performance in the latest Earnings Reports season, this gap may soon expand from a 'crevice' to an 'abyss.' Gabelli analysts indicate that if the demand in the chip Industry continues to be primarily driven by AI, this differentiation will persist at least until 2025.

UBS Group believes that strong demand for AI chips can still be seen, and during the Earnings Reports season, management's future demand guidance should be closely monitored. Analysts state that the biggest beneficiaries of these expenditures will be $NVIDIA(NVDA.US)$ , as the new Blackwell chip has been fully produced and customer demand is strong. Other companies expected to continue benefiting from the AI wave also include Taiwan Semiconductor. $Broadcom(AVGO.US)$ 、 $Arm Holdings(ARM.US)$、 $Micron Technology(MU.US)$ And $Advanced Micro Devices(AMD.US)$ and so on.

The differentiation within the Industry has raised higher demands for investors, and a blanket Buy of the entire Sector may no longer achieve "easy profits," or even fall into pitfalls like ASML Holding.

$Futu Holdings Ltd(FUTU.US)$ It provides a breakdown of the Revenue Composition, which can help you better understand the company's Business. Path: Individual stock Quote page > Company > Revenue Composition.

In the "Company" section, there is more information about the fundamentals, such as performance forecasts, Analyst Ratings, valuation analysis, and financial statements.

Data source: Futubull. This chart's content is for reference only and does not constitute any investment advice. Past performance does not predict future results, and the market has risks; investment requires caution.

The fiscal year of industry leader NVIDIA does not follow the calendar year, and the latest quarterly Earnings Report (25Q3) will be disclosed on November 20. However, the performance of other companies can be used to gauge the pulse of the industry, and AMD, which operates in the same field as NVIDIA, will announce its Earnings Report next week. As a major downstream customer of AI chips, $Microsoft(MSFT.US)$ 、 $Alphabet-C(GOOG.US)$ other technology giants will also release their performance results next week, and future capital expenditure trends are worth paying attention to.

Related Risks

AI development falling short of expectations: Currently, artificial intelligence is the main driving force in the chip industry. If expectations are not met during the application phase, it could severely impact industry demand.

Intensified competition in the industry: The chip industry is highly competitive, with rapid technological iterations. Companies need to continually invest to maintain a competitive edge, or they risk being left behind or even eliminated from the market.

Changes in the macro environment: After the Federal Reserve lowered interest rates by 50 basis points in September, U.S. economic data has consistently exceeded expectations, and the market is gradually pricing in a "No Landing" scenario for the economy. Recently, the yield on ten-year U.S. Treasury bonds surged to 4.2%, and if it continues to rise, it may suppress risk assets.

Risk Disclosure: This content does not constitute a research report, is for reference only, and should not be used as the basis for any investment decision. The information contained herein is not a comprehensive description of the securities, markets, or developments mentioned. Although the sources of information are considered reliable, the accuracy or completeness of the above content is not guaranteed. Furthermore, there is no guarantee regarding the accuracy of any statements, viewpoints, or forecasts provided in this article.