ASML slid as much as 8% on China's DUV breakthrough. We see opportunity

• ASML’s shares fell more than 8% intraday and closed roughly 6% lower following reports that a Chinese state-backed consortium had begun mass-producing domestic immersion DUV lithography tools. It aims to produce five units in 2026 before scaling output to 20 units in 2027.

• The revenue implications are limited. Based on ASML's 2025 results, five immersion DUV systems would account for only around 1.6% of net system sales, suggesting that the earnings impact over the next one to two years is likely to be negligible.

• Critically, the breakthrough relates to DUV, not EUV. ASML's monopoly in EUV lithography remains firmly intact, while China's domestic EUV efforts are reportedly still at the prototype stage.

• We reaffirm our target price of USD 2,266, which implies 36% upside from ASML's closing price on 27 July 2026. If anything, the recent pullback has made the risk-reward more compelling relative to our target than it was just two weeks ago.

What happened

On 27 July 2026, ASML’s shares fell more than 8% intraday and closed roughly 6% lower following reports that a Chinese state-backed consortium had begun mass-producing domestic immersion DUV lithography tools. The first systems are expected to be delivered before year-end to major domestic chipmakers such as the likes of SMIC, Hua Hong Semiconductor, and ChangXin Memory Technologies. The consortium reportedly aims to produce five units in 2026 before scaling output to 20 units in 2027.

The news caught the market off guard, reversing an early rally in chip equipment stocks that had been driven by easing Middle East tensions and reports that Nvidia was backing a USD 250 billion financing package for OpenAI's data center expansion. Adding to the sting, the report surfaced just as the US Congress was advancing the MATCH Act, which aims to block China from buying or servicing DUV tools. 

Why the near-term impact on ASML is limited

Immersion DUV is legacy technology, one category of ASML’s tools that Chinese chipmakers can still legally purchase after EUV exports were banned, and a segment that has been a meaningful revenue cushion in China. This news chips away at that cushion, and it deserves to be taken seriously as a long-term strategic signal that China is still pursuing its goal of self-sufficiency. 

But the numbers involved remain modest. ASML alone expects to ship approximately 130 immersion DUV systems this year, meaning five domestic Chinese machines would represent just 3.8% of that volume. Even if production scales to 20 units in 2027, that will amount to only 11.8% of ASML's projected immersion DUV capacity of around 169 systems. Those are hardly the volumes needed to displace a global market leader overnight.

The revenue implications are similarly limited. Based on ASML's 2025 results, five immersion DUV systems would account for only around 1.6% of net system sales, suggesting that the earnings impact over the next one to two years is likely to be negligible.

It does not end there.

The Chinese tools reportedly still lag ASML on precision, throughput, and reliability, and require further testing before they can be deployed at scale in commercial fabs. Bridging the gap between a functioning prototype and a production-ready system remains a significant challenge.

ASML’s own 2Q26 results had already flagged softening Chinese demand, meaning the company was managing this shift well before the headlines caught up. China’s share of ASML’s business has in fact been shrinking, not growing. In 2Q26, South Korea and Taiwan together accounted for 73% of net system sales versus just 14% from China, itself down from a larger share in prior years as export restrictions have progressively narrowed what ASML can sell there. The center of gravity for ASML’s business has already moved to where AI-driven memory and logic demand actually sits.

Related Article: ASML has not gotten cheaper. Our earnings estimates have gotten bigger

The key implication of the latest development is mostly strategic, not financial. Although China's domestic lithography program appears to be making progress, it remains to be seen whether these systems can become viable substitutes for ASML's machines at commercial scale. That reinforces the need to monitor China's long-term technological trajectory, particularly if similar progress is eventually made in EUV. 

Today's announcement, however, does not materially alter ASML's earnings power over the next few years. Growth remains driven by AI-related demand outside China, while the company's exposure to China has already been reduced meaningfully over the years. 

ASML’s long-term investment thesis remains unchanged

Nothing in this development touches the pillars of our investment thesis. ASML is still the only company capable of producing EUV lithography machines commercially. High-NA EUV took a fresh step forward last quarter with Intel Foundry qualifying the platform to produce its logic chips, the first high-volume logic product made on the platform. Furthermore, we believe TSMC's eventual adoption of High-NA EUV remains a significant and largely unpriced catalyst. That opportunity still lies ahead and is unaffected by developments in China's domestic DUV capabilities. 

The AI capex cycle that underpins demand is also not slowing. ASML raised full-year 2026 revenue guidance to EUR 43–45 billion in July, its second raise in three months, and narrowed the range in the process — a signal of improving visibility, not deteriorating conditions. 2027 Low-NA EUV capacity is close to being fully booked, and the company has already secured a significant number of orders extending into 2028.

Memory has also gone from a cyclical drag to a co-equal growth engine alongside logic, with management guiding memory-related system sales to grow over 75% this year as HBM-driven fab expansion accelerates across Korea and Taiwan. Most importantly, this demand is structural rather than cyclical as lithography intensity continues to rise as chip designs become more complex.

The installed base management business, a recurring, high-margin revenue stream that is structurally insulated from China's domestic DUV competition, grew 31.8% year-on-year last quarter and continues to outpace new system sales. Each lithography system can potentially generate service and maintenance revenue over a lifespan of up to 30 years, while every new system shipped expands this installed base and strengthens ASML's recurring revenue stream. 

Putting it all together, we view this sell-off as a valuation reset rather than a break in the investment thesis. We reaffirm our target price of USD 2,266, which implies 36% upside from ASML's closing price on 27 July 2026. If anything, the recent pullback has made the risk-reward more compelling relative to our target than it was just two weeks ago.

For existing shareholders, we view this weakness as an opportunity to add to positions rather than reduce exposure. For investors not yet invested, the pullback provides a more attractive entry point into a company whose long-term growth drivers remain firmly intact.

Figure 1: Share prices are driven by earnings in the long term