Both manufactured by Taiwan Semiconductor Manufacturing Company (TSM -0.70%) and ASML (ASML -0.32%) It plays an important role in the semiconductor industry. Taiwan Semiconductor (abbreviated as TSMC) is one of the world’s leading semiconductor contract manufacturing companies. Given the cost of building manufacturing facilities (called fabs or foundries), the availability of high production capacity that foundries require to operate profitably, and the technical expertise required, most semiconductor companies I prefer to just hire a third party to manufacture it. This is where TSMC fits in.
Meanwhile, ASML makes equipment used by companies such as TSMC to make semiconductors. Although the company has competitors, it is believed to have a near monopoly on extreme ultraviolet (EUV) lithography, a highly complex machine used to make advanced chips.
TSMC stock has been a clear winner this year, rising more than 90% at the time of writing. Meanwhile, ASML’s stock price fell by about 5% in 2024. Let’s take a look at which stocks are likely to outperform in 2025.
Both stocks are riding the chip boom.
TSMC has been a major beneficiary of the overall chip penetration and artificial intelligence (AI) infrastructure boom. The company’s technological expertise has propelled it to the forefront of advanced chip manufacturing. That’s why the world’s largest chipmakers, including Apple, Nvidia, and Broadcom, rely on it to make their cutting-edge chips.
Surprisingly, the AI chip boom hasn’t helped all chipmakers, as TSMC’s biggest rivals Intel and Samsung have struggled. This not only allowed the company to gain market share, but also gave it strong pricing power. This significantly increased TSMC’s gross profit.
TSMC has achieved significant growth this year, with third-quarter sales increasing 36% year-on-year to $23.5 billion. Meanwhile, the company’s gross margin improved 460 basis points sequentially to 57.8%, which led to a 50% year-over-year increase in revenue per American Depositary Receipt (ADR).
2025 looks like it will be another good year for the company. According to Morgan Stanley, the company plans to raise prices significantly in 2025. Meanwhile, given the demand for AI and other chips, TSMC is expanding its operations to help companies like Nvidia keep up with demand. It also just announced that a new factory in Japan has begun mass production of chips.
TSMC’s expansion should likely help ASML, as it is one of its big three customers for new technology, along with Samsung and Intel. However, the company has identified 2024 as a transition year to move to the next generation of high-NA EUV technology. This transition appears to have delayed some orders. Meanwhile, TSMC also balks at the high price tag of the new ASML machines (prices range from $350 million to $380 million each), but expects to receive the machines by the end of the year. However, the company says it doesn’t need the technology to make today’s high-end chips, and the machines won’t be used for mass production until at least 2030.
Although Intel has been the company most accepting of ASML’s new technology and was the first to acquire new high-NA EUV technology machines, its foundry business has struggled. The division’s revenue fell last quarter, but losses widened. The company is currently in some turmoil following the departure of its CEO in early December, and is reportedly considering spinning off its foundry business. ASML is likely to be affected as one of the three largest customers.
Meanwhile, nearly half of ASML’s 2024 revenue will come from China. This is despite the company being prohibited from selling its new chip manufacturing technology domestically. This is a big change from recent years, as China accounted for just 9% of sales in the fourth quarter of 2022. This may be the result of Chinese companies rushing to procure equipment due to concerns that the export ban will extend to older technologies.
All of this has led to uncertainty surrounding ASML, but the company is still essentially a monopoly on high-end semiconductor equipment, which should ultimately benefit it as chip production continues to grow.
Image source: Getty Images.
Rating and verdict
From a valuation perspective, TSMC is a cheap stock trading at around 22x forward price-earnings (P/E), while ASML’s forward P/E is currently 29x. TSMC is also growing its revenue faster. Last quarter’s growth was 36%, while ASML’s growth was 12%.
TSM PE Ratio (Forward 1y) Data by YCharts
TSMC is a cheaper stock that is growing faster, but I wouldn’t rule out ASML. Although its semiconductor equipment business can be a bit volatile, the company has a virtual monopoly on high-end chip manufacturing equipment in a market where demand for advanced AI chips continues to grow. In the long run, it is expected to be a winner.
That said, TSMC is a strong candidate for me next year. Fortunately, investors don’t have to choose one or the other and can comfortably buy both heading into 2025.
Jeffrey Seiler has no position in any stocks mentioned. The Motley Fool has positions in and recommends ASML, Apple, Intel, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and recommends the following options: February 2025 $27 short calls on Intel. The Motley Fool has a disclosure policy.
