ASML (NASDAQ: ASML) and Taiwan Semiconductor Manufacturing Co. (NYSE: TSM) (also known as TSMC) are both cornerstones of the global semiconductor market. ASML is the world’s largest manufacturer of photolithography systems that optically etch circuit patterns onto silicon wafers. TSMC, which manufactures chips using ASML’s systems, is the world’s largest and most technologically advanced contract chip manufacturer.
ASML is also the sole manufacturer of extreme ultraviolet (EUV) lithography systems used to manufacture the world’s smallest, densest, and most power-efficient chips. ASML’s largest customer, TSMC, uses these EUV systems to manufacture top-of-the-line chips for fabless chipmakers such as Apple, AMD, Nvidia, and Qualcomm.
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Therefore, without ASML, the world’s leading foundries such as TSMC, Samsung, and Intel would not be able to produce cutting-edge chips. And without these foundries, global semiconductor production would come to a halt.
This is why many investors see ASML and TSMC as leaders in this sector. However, while TSMC’s stock has more than doubled over the past 12 months, ASML’s stock has only risen about 10%. Let’s take a look at why TSMC outperformed ASML by such a large margin and will continue to generate even bigger profits in the near future.
ASML expects recovery to be slow
ASML’s revenue grew 14% in 2022 and 30% in 2023. Much of that growth was driven by the rapid expansion of the artificial intelligence (AI) market and a “process race” among top foundries to produce smaller, more advanced chips.
However, in 2024, the AI market will end its growth spurt, deal with stricter export regulations for Chinese chipmakers, and gradually transition from old “low NA” EUV systems to new “high NA” systems, resulting in revenue growth. is expected to remain flat. EUV system.
ASML initially expected sales to increase by 43% in 2025 as it increases shipments of high-NA EUV systems. The cost is more than double ($380 million) than a low-NA EUV system ($180 million), but there are additional costs involved. To make even smaller chips. However, ASML lowered its revenue outlook to just 7% to 25% growth in its recent third-quarter earnings report. Analysts still expect sales and profits to rise 25% and 44%, respectively, in 2025.
ASML primarily attributes the slower-than-expected recovery to the industry’s conservative adoption of high-NA EUV systems. TSMC and Samsung remain focused on pushing their low-NA EUV systems to the limits of existing chip manufacturing processes, and both companies just recently ordered their first high-NA EUV systems. Intel has previously placed orders for high-NA EUV systems, but plans could change if it ultimately spins off or sells its capital-intensive foundry business.
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Many chipmakers are focusing on producing more advanced AI chips on the same node, rather than aggressively miniaturizing them using more expensive lithography systems. Export restrictions by ASML on the sale of advanced lithography systems to Chinese chipmakers have further exacerbated that pressure.
TSMC faces fewer short-term headwinds
TSMC’s revenue increased by 34% in 2022, but decreased by 9% in 2023. The slowdown was driven by a slowdown in the PC market, the end of the smartphone 5G upgrade cycle, and macro headwinds for the data center market.
However, in its recent third-quarter earnings report, TSMC raised its full-year sales forecast from a growth rate of “mid-20%” to a growth rate of “nearly 30%.” Analysts had expected full-year sales to rise 26% and profits to rise 27%.
TSMC expects solid growth to be driven by the expansion of the AI market and stabilization of the PC and smartphone markets. In its latest quarter, the company generated 51% of its revenue from the high-performance computing (HPC) market, which includes Nvidia’s AI-oriented data center GPUs and AMD’s latest chips. Another 34% comes from the smartphone market, which includes mobile chip makers such as Qualcomm and Apple.
More than half of TSMC’s revenue for the quarter came from its smallest 5nm and 3nm nodes, but the company will reportedly continue to use its existing low-NA EUV systems for its upcoming 2nm and 1.6nm nodes. While this could save TSMC a lot of money, it could create problems for ASML. Analysts expect TSMC’s sales and profits to grow 24% and 27%, respectively, in 2025.
TSMC makes its cutting-edge chips in Taiwan, and only older, larger chips in China and other countries. This diversification naturally protects them from tightening export regulations against China, even if some fabless customers are barred from shipping cutting-edge chips to Chinese companies.
Better buy: TSMC
Both ASML and TSMC appear to be reasonably valued at forward P/E ratios of around 23x. ASML remains a solid long-term investment in the semiconductor market, but it is growing slower than TSMC, is more affected by export restrictions to China, and is not as broadly diversified. That’s why I believe TSMC will remain a stronger chip stock than ASML for the foreseeable future.
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Leo Sun holds positions at ASML and Apple. The Motley Fool has positions in and recommends ASML, Advanced Micro Devices, Apple, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: November 2024 $24 short calls on Intel. The Motley Fool has a disclosure policy.
“Better Chip Stock: ASML vs. TSMC” was originally published by The Motley Fool.
