Correction - Analysis - ASML's "supply shortage" outlook forces investors to look beyond demand

Correction to Mark Sloan's title in paragraph 13

Toby Sterling/Nathan Vifflin

Reuters Amsterdam, October 15 - In April this year, Christophe Fouquet, CEO of computer chip equipment manufacturer ASML, told shareholders that Europe’s most valuable company would do “whatever it takes” to avoid becoming a bottleneck in the chip industry.

Six months later, Fouquet admitted that ASML’s chip lithography machines—used to manufacture advanced logic and memory chips driving the AI boom—will not meet demand in both 2027 and 2028 (link).

For ASML’s clients, investors, and a stock price that is up nearly 70% this year, the focus has turned to whether the company can ramp up capacity quickly enough to profit from surging demand. Meanwhile, the market is increasingly anxious about whether the AI frenzy can last and the reliability of long-term forecasts stretching years ahead.

“ASML itself has now become the bottleneck,” said Han Dieperink, CEO of wealth management firm Aureus, which holds ASML shares. He added that the management publicly acknowledged that plans to boost capacity by 30% in 2027 and 2028 still wouldn’t be enough.

Dieperink noted that discussions regarding future orders now extend into 2029 and 2030, a sign, in his view, that demand could continue to exceed supply even after the current cycle ends.

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Valuation Battle

ASML’s plans to tackle the backlog include reducing assembly times, upgrading equipment already in use, and rolling out faster models. The company had planned to boost annual capacity to 110 units of the $200 million EUV lithography machines by 2028, but is now considering adding about 12 more units.

Additionally, the company is expanding production in Eindhoven (link), though stage one is not expected to come online until 2029.

On Wednesday, Fouquet assured investors of one thing: ASML’s own supply chain—including critical optical component supplier Zeiss—is not a limiting factor.

Investors say uncertainty rises after 2028, and company valuation reflects this. Since June, despite analysts upgrading profit forecasts, ASML’s share price has lagged relative to expected earnings.

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Mark Sloan, Senior Analyst at Stonehage Fleming, said the stock has become attractive as its valuation—which exceeded 45 times forward earnings in June—has dropped to about 30 times, given ASML’s growth outlook and market dominance. Sloan’s “Global Best Investment Ideas” fund holds a 3.5% position in ASML.

“We are closely watching AI adoption and innovation, as well as capex plans from major customers,” he said. “We believe supply, rather than demand, is likely to remain the key constraint for ASML.”

ASML has previously stated that price increases in 2027 and 2028 will also boost its returns.

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Concerns Over an AI Sell-Off

Not all investors are so convinced. Skeptics question whether the surge in AI infrastructure spending will ultimately generate returns large enough to justify multibillion-dollar investments.

Chip stocks also face pressure from concerns that rising interest rates could make it harder to finance large AI and data center projects (link). On Thursday, the cost of default insurance for U.S. tech firms hit a record high (link).

Jefferies analyst Janardan Menon said concerns around financing for AI investment, combined with factors such as constraints on data center expansion like electricity supply, could put pressure on ASML. The company’s shares fell 5% on Thursday amid a broader market sell-off.

“The main reason for the valuation drop is skepticism toward the extremely high expectations for 2028 and 2029,” Menon said, adding that during market downturns, ASML’s price-to-earnings ratio could drop to just above 20.

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“We Don’t Want to Say ‘Sold Out’”

ASML’s clients are still scrambling for access to its unmatched high-end chip manufacturing equipment. The company now requires large deposits at the time of ordering. CFO Roger Dassen said if clients later try to cancel, the deposit is “enough to cause pain.”

Top customer TSMC 2330.TW — which makes chips for Nvidia NVDA.O and Apple AAPL.O — said in July that equipment supply would not limit its expansion plans. On Thursday, it reiterated its capital spending plans of $60-64 billion for 2026 (link).

With strong demand for AI memory chips, Samsung 005930.KS, SK Hynix 000660.KS, and Micron MU.O have also been reserving ASML production capacity.

Potential new clients could bring added pressure. Elon Musk’s proposed TeraFab project, though it has yet to produce its first chip, could become a major buyer of advanced gear; meanwhile, U.S. restrictions on China remain a risk for sales of ASML’s mid-range DUV equipment. Chinese sales are expected to account for about 20% of ASML’s revenue this year.

Despite strong demand, ASML is currently not accepting orders for 2029 and 2030, preferring to assess its clients’ readiness and its own ability to meet future demand.

“We don’t want to take orders from clients A, B, and C for 2029 and 2030 now, then have to tell client D, who hasn’t ordered yet, ‘Sorry, we’re already sold out,’” Dassen told analysts on the earnings call.

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(To assist non-native English speakers, Reuters has automatically translated this report into several other languages. Automated translation may be inaccurate or lack nuance; Reuters does not guarantee the accuracy of the automated translation, which is provided for reader convenience only. Reuters assumes no responsibility for any harm or loss arising from the use of the automated translation function.)