ASML vs. TSMC: What's the Better AI Buy in 2025?

The recent surge in artificial intelligence (AI) stocks has caught the attention of many investors. With the promise of significant returns and the rapid increase in some AI-related businesses, it can be tricky to assess which stocks offer the best potential for growth.

Amid this excitement, it's easy to overlook two crucial companies involved in creating the technology that powers AI: ASML and TSMC. These firms have distinct yet vital roles in the manufacturing chain. Though both companies are indispensable to each other in their current capacities, one may prove to be the more suitable investment choice for the future.

The State of Two Businesses

When comparing the two, ASML seems to have a stronger foothold due to its specialty technology. Historically, ASML has held a dominant position in the extreme ultraviolet (EUV) lithography market, which is essential for producing the most advanced semiconductor chips.

While new technologies developed by researchers in Japan may offer simpler and cost-effective alternatives to EUV lithography, competitors like Nikon and Canon are still far from posing a real threat to ASML's market standing. For now, ASML is likely to maintain its lead in this area.

This monopoly is what allows TSMC to rely heavily on ASML for the equipment necessary to manufacture cutting-edge chips. TSMC works directly with prominent chip designers such as Nvidia, AMD, and Qualcomm, producing the chips they need.

Despite facing challenges such as competition from Samsung and Intel, along with geopolitical pressures that encourage more chip production in North America and Europe, TSMC still boasts a commanding presence in the foundry market, reportedly holding 62% market share as noted by TrendForce. This substantial market share lends TSMC a position of necessity, despite external pressures.

Comparing the Financials

Given both companies' critical roles in the semiconductor market for AI, both have the potential to outperform the broader market. However, determining which is likely to yield better returns can be assessed through their financial performance.

In the first three quarters of 2024, ASML reported revenue of 19 billion euros (about $19.6 billion), marking a 6% decline compared to the previous year. Analysts suggest that the slowdown in demand, particularly from China, has led to this drop. Consequently, ASML's net income fell to 4.9 billion euros ($5.0 billion) over the same period, down from 5.8 billion euros during the previous year.

Conversely, TSMC is experiencing growth, with a revenue of $63 billion in the first nine months of 2024, reflecting a 32% increase year-over-year. As its expenses have remained consistent with its revenue growth, TSMC's comprehensive income surged to $26 billion during this period, up 33% from the previous year.

These contrasting financial results reveal why TSMC has significantly outperformed ASML over the past year.

Even with the strong performance of TSMC, ASML maintains a higher price-to-earnings (P/E) ratio of 39, compared to TSMC's 33. However, when considering the historical P/E ratios of both companies, one can see that ASML has had an average of 43 over the past five years, suggesting it's currently undervalued. Meanwhile, TSMC's average P/E has been 24 during the same timeframe, indicating it could experience a price correction if market conditions deteriorate.

ASML or TSMC?

The varying average valuations make the decision between these two AI stocks challenging, yet it seems more plausible that TSMC might offer better returns. Notably, TSMC's reliance on ASML indicates a degree of stability for ASML. However, the declining revenue at ASML suggests that the company could be experiencing underlying issues.

Investors need to be cautious, especially since TSMC's higher-than-average earnings multiple might imply higher risks. Nevertheless, given the current valuation of 33 times earnings, it is relatively low for an AI stock. The ongoing AI boom could result in significant revenue and earnings growth for TSMC, making the valuation premium appear less risky, which could enhance returns for investors in the coming years.

Will Healy has positions in Advanced Micro Devices, Intel, and Qualcomm. The assessment does not represent a recommendation for or against any investment in ASML, TSMC, or other related companies.

AI, Stocks, Investment