ASML Holding (ASML) stock fell nearly 4% on July 5, extending its year-to-date decline to more than 45%. The stock dropped following a report about potential headwinds in one of the company’s most important markets.
ASML is a Dutch company that builds chipmaking equipment. While it may be tempting to buy the dip in ASML stock, considering that its business has a bright future with increasing demand for chips, you would want to look before you leap.
ASML Could Lose Access to China
The U.S. government is pushing hard to block ASML from selling its chipmaking equipment to China, according to a Bloomberg report. The effort is part of a campaign to curb China’s rise in the technology sector, particularly in crucial technology areas such as semiconductor chip production. The U.S. previously banned China’s Huawei from accessing certain U.S. technologies. It also lobbied its allies to block Huawei from their 5G markets.
ASML is already restricted from shipping its most advanced chipmaking gear to China. The U.S. is looking to expand the restriction to include certain older machines, according to the report.
If ASML is banned from selling its equipment to China, then the company could suffer a major blow. China is its third-largest market after Taiwan and South Korea. In 2021, ASML’s sales to China totaled €2.74 billion, with the country contributing 14.7% of the company’s revenue.
Could ASML Survive Losing the Chinese Market?
ASML is the leading supplier of lithography machines, which perform a crucial function in the chipmaking process. If it is cut off from China, ASML could see demand for its machines rise in other markets considering its near monopoly in this segment. As a result, the company could make up for the lost China sales in a short time.
The blow could even be far less severe if ASML’s rivals are also blocked from selling to China. The other major suppliers of chipmaking machines are Nikon from Japan, and Applied Materials (AMAT) and Lam Research (LRCX) from the United States.
Wall Street’s Take on ASML
Consensus rating on ASML stock among analysts is a Strong Buy, based on four Buys and one Hold. The average ASML price forecast of $662.50 implies upside potential of 53% to current levels.
Bloggers Are Bullish
TipRanks data shows that financial blogger opinions are 100% Bullish on ASML, compared to a sector average of 65%.
Key Takeaway for Investors
While the push to block sales to China may inject a dose of uncertainty into ASML’s business, the broader industry conditions generally look favorable for the company. The semiconductor industry is going to need more chipmaking machines amid efforts to address the global chip shortage. For example, Intel (INTC) and Taiwan Semiconductor (TSM) plan to build large chipmaking facilities in the U.S. to expand their production capacity by taking advantage of the CHIPS Act.
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