ASML's Valuation Gap Narrows to Decade Low Despite Raised Outlook

ASML's Q1 2026 sales beat estimates, but shares fell as the market had priced in growth. Sales mix shifts to Korea for AI memory, while China's share plummets amid export control risks.

A robust quarterly performance and an upgraded annual forecast were not enough to shield ASML Holding NV's shares from a sell-off this week. The initial 6% drop on Wednesday, despite the strong figures, highlighted a market that appears to have already priced in the chip equipment maker's growth narrative, compressing its valuation premium to a level not seen in a decade.

The Dutch company reported first-quarter 2026 net sales of €8.8 billion and net profit of €2.8 billion, comfortably exceeding analyst consensus estimates of €8.5 billion and €2.5 billion, respectively. Gross margin reached 53%, hitting the top end of its guided range. Compared to the prior year's €7.7 billion, sales showed solid growth.

Investors quickly shifted focus from the historical beat to the forward-looking statements. While ASML raised its full-year 2026 net sales forecast to a range of €36 billion to €40 billion, up from €34 billion to €39 billion, it projected a second-quarter gross margin of 51% to 52%. This was interpreted by the market as a slight normalization from the exceptionally strong start to the year, contributing to the mid-week share price decline.

The regional sales mix told a story of shifting geopolitical and end-market dynamics. South Korea contributed a dominant 45% of system sales in Q1, a sharp increase from 22% in the prior quarter. This surge is driven by massive investments from memory giants like Samsung and SK Hynix to meet soaring demand for High-Bandwidth Memory (HBM) used in artificial intelligence applications. Reports suggest Samsung alone ordered around 20 EUV systems for its Pyeongtaek fab.

Conversely, China's share of system sales plummeted to 19% from 36% in the fourth quarter of 2025. CFO Roger Dassen confirmed that the raised annual outlook is entirely attributable to non-China regions. CEO Christophe Fouquet noted the new forecast range accounts for potential scenarios regarding export control discussions, referencing a recent U.S. legislative proposal that could ban ASML from selling older DUV lithography machines to Chinese chipmakers.

The share price recovered significantly on Thursday, climbing over 3% to around €1,245, building on a year-to-date gain exceeding 25%. The stock remains within 4% of its 52-week high of €1,295. The company also demonstrated shareholder returns, executing €1.1 billion in share buybacks during the quarter and announcing a 17% increase in the total dividend for 2025 to €7.50 per share.

Yet, a more telling metric emerged from the valuation analysis. ASML now trades at approximately 37 times expected 12-month earnings, a premium of only about 17% over U.S. peer Applied Materials. Analysts note this premium hasn't been smaller since 2014. "The market has already anticipated the growth ASML is now announcing," an analyst from Quilter Cheviot observed.

Adding a layer of uncertainty, ASML discontinued its practice of disclosing quarterly order bookings. While CEO Fouquet described demand as "still very strong," the lack of a concrete figure leaves investors without a key verification tool. Operationally, the company plans to ship more than 60 EUV lithography systems in 2026, including both low-NA and the new high-NA machines, with capacity plans aiming for 80 units in 2027.