Everyone’s Focused on China—But That’s Not ASML’s Biggest Risk

Few companies have benefited more from the AI gold rush than ASML Holdings N.V. (NASDAQ: ASML), which has a monopoly on a key bottleneck in the semiconductor pipeline.

But its grip on the market was shaken this week by reports that a Chinese competitor has begun producing similar lithography machines, driving ASML shares down 10% in just two sessions and bringing its 30-day drawdown closer to bear-market territory.

Other stocks along the semiconductor supply chain, like KLA Corp. (NASDAQ: KLA) and Applied Materials Inc. (NASDAQ: AMAT), were also dragged down, but there’s no reason for investors to panic about ASML's position—at least not yet.

What the News This Week Really Says About China’s Lithography Challenge

The competitor finally has a name: Shanghai Aishengna Electronic Technology Group, a state-sponsored conglomeration of multiple Chinese tech firms. Founded in 2023, the company plans to ship five of its deep ultraviolet (DUV) lithography machines this year, with another 20 tentatively scheduled for 2027. Details are scant given the source country, but the company appears to have pulled teams from multiple industries to build a domestic competitor to ASML’s ultraviolet lithography machines, which can cost upwards of $40 million per unit.

ASML has had a stranglehold over this particular industry since the start of the AI boom, but after a 130% gain over the last 12 months, investors have itchy trigger fingers. However, there seems to be little in this narrative that actually threatens the company’s engineering, at least not anytime soon. ASML plans to ship 130 DUV machines in 2026, with capacity expanding another 30% in 2027. The company raised full-year revenue and gross margin guidance during its Q2 2026 earnings report in late June, despite Q2 system sales to China declining to 14% of net, down from 19% in Q1.

Additionally, ASML’s true monopoly lies in extreme ultraviolet (EUV) lithography, a technology that Aishengna appears many years away from harnessing (if at all). ASML has spent the better part of two decades developing its tech and making deals with crucial partners, such as Zeiss SMT, which makes the precise optical systems used by EUV machines. Currently, Aishengna can only produce DUV lithography machines that operate at a 193-nanometer (nm) wavelength. ASML’s EUV machines operate at a 13.5nm wavelength, giving it sole access to an array of next-gen semiconductors that require the density only EUV can provide.

ASML’s sales to China are already declining, and the fact that it’s adding DUV and EUV capacity shows that management isn’t taking Aishengna as a serious threat to its backlog. The Chinese machine is also unproven and will require rigorous testing before it can be considered a match for ASML’s available models. Plus, no competitor can lay a finger on ASML’s Installed Base Management segment, which accounts for maintenance and upgrades to existing systems. Installed Base Management generated 30% of the company’s Q2 revenue, a number that grew 5% year-over-year (YOY).

The True Threat Is Legislative, Not Engineering

The tech might be inferior, but when has an inferior product ever stopped the government from putting its thumb on the scale? Any competitor accepting a less capable system also accepts lower productivity and higher costs, and no company is going to choose worse outcomes on purpose. But companies in China may soon have no choice.

Beijing has long sought to tamp down on the influence of foreign AI tools, implementing strong subsidies for domestically manufactured equipment and incentives to hire talent. Meanwhile, in Washington, Congress has introduced the MATCH Act, a bill to limit the sale of semiconductor equipment to U.S. adversaries (i.e., China). All DUV immersion machines and services are covered under the bill, which would stonewall ASML from selling or servicing products in China.

The bill has yet to pass the House, so introduction of these protocols is likely an early 2027 story, but it does create a converging thesis. Aishengna may not need to displace ASML’s tech; it just needs to provide an alternative that export-strapped Chinese firms can use.

Chart Shows Pullback Has Teeth, But Long-Term Uptrend in Place

Whether the threat is political or engineering-based, it has exacerbated the downtrend in ASML shares, which have fallen over 15% in the last month. During its 12-month run, the stock has become no stranger to bear traps, in which the price dips below the 50-day moving average, sending a sell signal to investors. But this is often a false positive when the long-term uptrend remains intact, and this could be an opportunity for investors to buy the stock at less than 40 times forward earnings.

The Relative Strength Index (RSI) shows that selling pressure has driven the stock below its typical range, and the indicator is now approaching the oversold threshold of 30. But the 50-day and 200-day moving averages still suggest a strong underlying uptrend, and neither the legislative nor engineering threats can touch the company’s EUV franchise or its record backlog.

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The article "Everyone’s Focused on China—But That’s Not ASML’s Biggest Risk" first appeared on MarketBeat.