By Adam Levine

Quarterly earnings for Taiwan Semiconductor Manufacturing and the Netherlands' ASML often fly below the radar in the U.S. But the reports offer important details for U.S. tech investors, and this week's results may be even more telling than usual.

Both companies are crucial parts of the global semiconductor supply chain. ASML makes lithography machines -- costing up to 220 million euros ($250 million) -- for etching tiny transistors onto silicon. One of its main customers, TSMC, makes chips for Apple, Nvidia, Advanced Micro Devices, and a host of others. ASML also sells to other chip manufacturers, including memory companies like Micron.

In their quarterly reports this week, both companies highlighted the impact of surging AI-related demand on the semiconductor business, but they also cautioned that new and shifting tariff policy from the U.S. has injected significant uncertainty into their outlooks for 2025 and beyond.

ASML CEO Christophe Fouquet began his earnings call presentation by laying out the competing factors of AI and tariffs. "If AI demand continues to be strong and customers are successful in bringing on additional capacity to support the demand, there is a potential opportunity towards the upper end of our [annual guidance] range," he said. "On the other hand, there is still quite some uncertainty for a number of our customers that can lead to the lower end of our range."

On the AI front, it is full steam ahead, at least for now. TSMC's capital expenditures are a good indicator of where its leadership thinks the semiconductor business is headed. In the fourth quarter of 2024, TSMC posted a dramatic rise in capex, up 91% from the previous quarter, and kept up that accelerated pace in the recent first quarter. It reiterated its 2025 annual capex guidance for $38 to $42 billion, which would exceed its 2022 record of $37 billion.

But 2022 also offers a cautionary note. At the beginning of that year, TSMC offered up a capex guidance range of $40 billion to $44 billion, and then fell short of that pace throughout the year -- an early warning sign that things were turning down for the semiconductor business.

From TSMC's point of view, the uncertainty unleashed by U.S. tariffs hasn't yet affected its broad customer base, but the company remains on the lookout for signs that shifting policy is impacting demand.

As a measure of the uncertainty, ASML gave a wider range than usual for its second quarter gross margin guidance, and highlighted that fact in response to analyst questions. ASML chief financial officer Roger Dassen said the company may have to absorb extra tariff costs at first, but that it would raise prices as new orders come in.

Finally, ASML's Chinese demand has been an excellent predictor of another trend: Chinese customers bolstering their own manufacturing capacity as the country seeks independence from foreign chip makers. In 2023 and 2024, ASML saw a huge surge of revenue from China. That has slowed a bit in 2025, but Chinese customers still represented about a quarter of ASML's revenue so far in 2025. In 2022, Chinese sales were just 14% of the company's revenue.

The surge is all the more notable since Western governments have banned ASML from selling its most expensive machines in China.

"Demand continues to be very strong, and that is on the back of the demand for mainstream chips in China, both for domestic consumption but also for what China exports to the rest of the world," Dassen said. "So, that demand is still resilient and, in fact, a bit better than what we anticipated three months ago."

ASML has been talking about China's growing appetite for lower tech chip making equipment for a while now, and it highlights a danger for non-Chinese chip makers like Texas Instruments, STMicroelectronics, and Onsemi. Frequently over the past three decades, Chinese companies have quickly built up industrial capacity for new products. Once those firms exhaust domestic demand, the remaining inventory gets sent to the rest of the world at cut-rate prices. It's a rising risk for the chip sector.

Write to Adam Levine at adam.levine@barrons.com

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April 18, 2025 10:46 ET (14:46 GMT)

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