Why Micron, Arm Holdings and ASML Holdings Collapsed Today

Favorite Semiconductor Stocks Micron technology (MU -7.96%), Arm holds (ARM -6.88%)and ASML Holdings (ASML -6.47%) fell hard for early September, down 8%, 6.9% and 6.5%, respectively, at the close of trade on Tuesday.

Weaker-than-expected macroeconomic data sent the entire chip sector sharply lower, and ASML drew attention in a trade war over China over the weekend. But is this pullback a buying opportunity?

Weaker-than-expected production sends chips into a tailspin

As of Tuesday, each of these three stocks had performed well to great in the market year to date, likely setting them up for more pronounced selling on bad news. By Friday’s close, Arm Holdings was up 77% in 2024 as AI excitement took hold for its new data center and PC solutions. ASML, which is the dominant supplier of EUV lithography machines that are crucial to the production of cutting-edge chips and memory for AI, rose 20 percent despite a swoon in July. And Micron rose just 13% as earlier enthusiasm for its AI prospects tempered amid weak economic readings for the highly cyclical memory player.

While these three companies have benefited from optimism about the future of AI, each is also somewhat cyclical, and their results can flow with the economy.

On that front, there was pessimistic news about US and Chinese manufacturing. On Tuesday morning, the Institute for Supply Management released its Manufacturing Purchasing Managers’ Index for August, which came in weaker than analysts expected. The August reading was 47.2. While that was up from 46.8 in July, it was below the Dow Jones analyst consensus expectation of 47.9.

But some details were more troubling. The new orders index was weaker than the overall reading of 44.6, down from 47.4 in July. But the Price Index actually rose to 54 from 52.9 last month. And the Stocks Index increased by 5.8 points, to 50.3.

The combination of lower orders, rising inventories, and further rising labor and transportation costs points to the worst of all possible worlds: a stagflationary setup. That could hurt the Fed’s ability to cut interest rates aggressively despite Tuesday’s decline in manufacturing.

Of note, there were also issues with China over the weekend: a report showed its manufacturing activity fell to a six-month low of 49.1 in July, marking its fourth consecutive reading below 50. China’s economy was stuck in -a crisis for some time and it doesn’t seem to be coming out of it anytime soon. Of note, China is a big buyer of semiconductors, so weak economic activity there could have an effect on all three of these companies.

In addition, China threatened on Monday to stop buying ASML equipment. Last week, it was reported that the Netherlands may restrict ASML’s sales and service even for certain older deep ultraviolet lithography machines from China. But on Monday, an article from the Chinese government claimed Global Times said China could cut ASML “permanently” from the country if the Dutch government continued with these restrictions.

ASML is the global leader in lithography, so it is not clear how China could replace all these machines. Still, losing that country as a market would be a bad scenario for ASML — it got 49 percent of its revenue from China last quarter. While some of the cars that would have gone there would likely be sold to companies in other geographies if China couldn’t make its own chips, ASML might not recoup 100% of the lost sales, and this kind of move would very disturbing.

Image source: Getty Images.

But it might not all be bad news

August’s manufacturing figure was certainly not great, fueling fears that the Federal Reserve has fallen behind the curve on its fiscal policy pivot, which could lead to lower economic growth or even recession in the coming quarters.

However, there were a few things the semiconductor bulls need to hold on to. First, while a reading below 50 indicates a contraction for the manufacturing sector, the 42.5 threshold is the level that indicates a broader economic downturn overall, and the US is still well above that.

Second, digging deeper into the purchasing managers’ quotes included in the report, the electronics industry manager’s quote was actually upbeat: “The business outlook is good. The recovery from the slowdown in the electronics sector is strong for the second half of the year”. Moreover, the institute reported that of the six largest manufacturing sectors, only the computer and electronics segment reported growth in new orders and production growth.

The personal electronics industry went into recession at the end of 2022 and appears to be recovering, while industrials and cars are now stuck in the middle of their own recessions. So while higher benchmark interest rates appear to have contributed to a slowdown in most manufacturing sectors, the computer and electronics sector appears to be a strong outlier — at least for now.

As the chip sector largely sold off on Tuesday’s poor economic headlines, investors may want to take the opportunity to increase positions in their favorite chip stocks.