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

Toby Sterling/Nathan Vifflin

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

Six months later, Fouquet admitted that ASML’s ability to supply lithography equipment for manufacturing advanced logic and memory chips powering the AI boom would fall short of demand in both 2027 and 2028 (link).

For customers, investors, and ASML—whose shares are up nearly 70% this year—the focus is now on whether the company can scale capacity fast enough to profit from tremendous demand. At the same time, there’s increasing concern in the market over the sustainability of the AI boom and forecasts stretching years into the future.

“ASML itself has now become the bottleneck,” said Han Dieperink, chief investment officer at wealth management company Aureus, which holds ASML stock, adding that management has admitted publicly that plans to increase capacity by 30% in 2027 and 2028 still won’t be enough.

Dieperink noted that discussions about future orders have now extended into 2029 and 2030, which he believes indicates demand may continue to outstrip supply even after the current cycle ends.

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Valuation debate

ASML’s plans to address the order backlog include shortening assembly times, upgrading existing tools in use, and introducing faster models. Originally, the company planned to increase output of its $200 million EUV lithography machines to 110 units annually by 2028 but is now considering raising this by an additional 12 machines.

In addition, the company is expanding production capacity in Eindhoven (link), although phase one is not expected to go online until 2029.

On Wednesday, Fouquet offered reassurance to investors on one point: ASML’s own supply chain—including key optical system provider Zeiss—is not a limiting factor.

Investors say uncertainty increases after 2028, and the company's valuation reflects that. Despite financial analysts ramping up profit forecasts since June, ASML’s share price has lagged relative to future earnings.

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Mark Sloan, portfolio manager at Stonehage Fleming, said that considering ASML’s growth prospects and market dominance, its valuation—falling from over 45x forward earnings in June to about 30x now—makes the stock quite attractive. The firm’s “Global Best Ideas” fund currently holds a 3.5% position in ASML.

“We are closely monitoring the adoption and innovation in AI and the capital expenditure plans of major customers,” he said. “We believe supply, not demand, is likely to remain ASML’s main constraint.”

ASML has previously said that price hikes in 2027 and 2028 will also deliver benefits.

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AI sell-off fears

Not all investors are convinced. Skeptics question whether the surge in AI infrastructure spending will ultimately generate returns sufficient to justify current multi-billion dollar investments.

Chip stocks are also under pressure from concerns that rising rates may make it harder to finance large AI and data center projects (link). On Thursday, default insurance costs for the US tech sector hit an all-time high (link).

Jefferies analyst Janardan Menon said that concerns about financing for AI investments, together with factors such as power supply restricting data center expansion, could put pressure on ASML. The company’s shares fell 5% on Thursday amid a broader sell-off.

“The main driver of the valuation reset is skepticism about extremely high expectations in 2028 and 2029,” Menon said, adding that ASML’s P/E ratio could fall to just above 20x during market downturns.

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“We don’t want to say ‘sold out’”

ASML’s customers are still scrambling to secure its unrivaled high-end chipmaking equipment. The company now requires customers to make large downpayments at the time of ordering, and CFO Roger Dassen said this payment would be “painful to lose” if a client later tries to cancel an order.

Its largest customer, TSMC 2330.TW—which makes chips for Nvidia NVDA.O and Apple AAPL.O—said in July that it didn’t expect equipment supply to constrain its expansion plans. On Thursday, the company reiterated its $60–64 billion capital expenditure plan for 2026 (link).

Amid robust demand for AI memory chips, Samsung 005930.KS, SK Hynix 000660.KS, and Micron MU.O have also been booking ASML’s production slots.

New potential customers may add further pressure. Elon Musk’s proposed TeraFab project, though it hasn’t produced its first chip, could become a major buyer of advanced equipment; US restrictions on China remain a risk for sales of ASML’s mid-range DUV tools. China is expected to account for about 20% of ASML’s sales this year.

Despite strong demand, ASML isn’t accepting orders for 2029 and 2030 for now, to assess client preparedness and its own ability to meet future needs.

“We don’t want to take orders from customers A, B, and C now and then tell customer D, who comes later for 2029 and 2030, ‘Sorry, we’re sold out’,” Dassen told analysts on an earnings call.

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(For the convenience of non-English speakers, Reuters has provided automated translation of its reports into several other languages. Because automated translation may contain errors or lack necessary context, Reuters does not guarantee the accuracy of automated translations and provides them only for the convenience of readers. Reuters accepts no responsibility for any damage or loss arising from the use of automated translation.)