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ASML (ASML -9%) turns significantly lower today despite the Dutch-based photolithography machine manufacturer topping sales and earnings forecasts in Q2. In what appears to be a mirror image of last quarter, ASML's upcoming quarterly guidance was bearish, projecting Q3 revs below consensus. However, unlike in Q1, ASML expanded bookings -- its order book, a metric closely watched by investors -- by a healthy 23.7% yr/yr to €5.57 bln. ASML also reiterated its FY24 revenue guidance of €27.56 bln.

Why are investors reacting negatively? There are a few factors. Bloomberg reported that President Biden was mulling additional restrictions on chip exports to China, targeting overseas companies like ASML for giving the country access to its technology. ASML is already dealing with the impact of the Dutch government's export controls on semiconductor equipment. With customers in China accounting for over a quarter of ASML's FY23 sales, further restrictions could have a material impact on future performance.

Meanwhile, shares tacked on nearly +25% since last quarter, moving to all-time highs last week, which increased the risk of profit-taking today, particularly after another disappointing quarterly forecast. ASML's Q3 revenue target of €6.7-7.3 bln, while it marks a snap back to positive yr/yr growth following two straight quarters of declines, was lighter than analysts anticipated. ASML continues to view 2024 as a transition year, which can keep volatility and macroeconomic uncertainty elevated.

• ASML delivered a similar-sized earnings beat as last quarter, clearing analyst estimates by double-digits in Q2. However, the effects of a transition year remain prevalent, with EPS dropping by 18.7% yr/yr to €4.01. Likewise, revenue slid for the second straight quarter, declining by 9.5% yr/yr to €6.24 bln.
• However, the market places more weight on ASML's quarterly bookings figure, which jumped by 54% sequentially. EUV, responsible for creating the most advanced chips, accounted for just under half of the bookings. CEO Christophe Fouquet, who has been in the corner office since April, said that overall semiconductor inventory levels continued to improve during Q2, supporting a strong qtr/qtr leap in bookings.
• Mr. Fouquet also mentioned that the company continues to see robust developments in AI, which has been driving most of the industry's recovery and growth, especially across its memory end market. ASML noted that memory customers may look to upgrade their systems in preparation for an anticipated surge in demand in 2025.
• Alongside AI, the company cited a few other secular growth drivers, including a global energy transition and vehicle electrification. Additionally, ASML is preparing for many new fabs being built globally. As a reminder, ASML dominates the lithography systems market and is engrained in the chip-making process for titans like Intel (INTC), Taiwan Semi (TSM), and Samsung (SSNLF), all of which have been increasing capacity.

While ASML is experiencing a sell-off today, similar to what happened last quarter, this drop could be temporary if the excitement surrounding AI does not subside. Even though sector rotation has started to cause previously beloved AI darlings such as ASML to fall mildly out of favor among investors, ASML remains in a prime position to take full advantage of an expected ramp-up come 2025.