ASML (ASML 3.23%) and Taiwan Semiconductor Manufacturing (TSM -2.46%), often known as TSMC, are each linchpins of the worldwide semiconductor market. ASML is the world’s largest producer of photolithography programs, which optically etch circuit patterns onto silicon wafers. TSMC, which makes use of ASML’s programs to fabricate its chips, is the world’s largest and most technologically superior contract chipmaker.
ASML can also be the one producer of utmost ultraviolet (EUV) lithography programs, that are used to provide the world’s smallest, densest, and most power-efficient chips. ASML’s largest buyer, TSMC, makes use of these EUV programs to fabricate top-tier chips for fabless chipmakers like Apple, AMD, Nvidia, and Qualcomm.
Picture supply: Getty Photos.
So with out ASML, the world’s main foundries — together with TSMC, Samsung, and Intel — could not manufacture their most superior chips. And with out these foundries, the worldwide manufacturing of semiconductors would grind to a halt.
That is why many buyers see ASML and TSMC because the bellwethers of the sector. However over the previous 12 months, ASML’s inventory solely rose about 10%, as TSMC’s inventory greater than doubled. Let’s have a look at why TSMC outperformed ASML by such a large margin — and if it would proceed to generate greater beneficial properties for the foreseeable future.
ASML expects a slower restoration
ASML’s income rose 14% in 2022 and 30% in 2023. A variety of that development was pushed by the fast growth of the factitious intelligence (AI) market and the “course of race” between the highest foundries to fabricate smaller and extra superior chips.
However in 2024, it expects it income development to flatline because it laps the AI market’s development spurt, copes with tighter export curbs for Chinese language chipmakers, and step by step transitions from its older “low-NA” EUV programs to its newer “high-NA” EUV programs.
ASML initially anticipated its income to rise 43% in 2025 because it ramped up its shipments of high-NA EUV programs, which value greater than twice as a lot ($380 million) as its low-NA EUV programs ($180 million), however are required to fabricate even smaller chips. However in its latest third-quarter earnings report, ASML diminished that income outlook to only 7%-25% development. Analysts nonetheless count on its income and earnings to rise 25% and 44%, respectively, in 2025.
ASML primarily blamed that slower-than-expected restoration on the business’s conservative adoption of its high-NA EUV programs. TSMC and Samsung are nonetheless targeted on pushing their low-NA EUV programs to the restrict for his or her present chipmaking processes, and each corporations solely not too long ago ordered their first high-NA EUV programs. Intel ordered its high-NA EUV programs earlier, however these plans might shift if it lastly spins off or sells its capital-intensive foundry enterprise.
Many chipmakers are additionally targeted on producing extra superior AI chips on the identical nodes, as a substitute of aggressively shrinking them down with dearer lithography programs. The export restrictions towards ASML’s gross sales of superior lithography programs to Chinese language chipmakers has been exacerbating that stress.
TSMC faces fewer near-term headwinds
TSMC’s income rose 34% in 2022, however declined 9% in 2023. That deceleration was attributable to the PC market’s slowdown, the tip of the 5G improve cycle for smartphones, and macro headwinds for the information middle market.
However in its latest third-quarter earnings report, TSMC raised its full-year income outlook from the “mid-20s” development to “practically 30%” development. Analysts had anticipated its income and earnings to rise 26% and 27%, respectively, for the total yr.
TSMC expects that sturdy development to be pushed by the growth of the AI market and the stabilization of the PC and smartphone markets. In its newest quarter, the corporate generated 51% of its income from the high-performance computing (HPC) market, which incorporates Nvidia’s AI-oriented information middle GPUs and AMD’s newest chips. One other 34% got here from the smartphone market, which incorporates cellular chipmakers like Qualcomm and Apple.
Greater than half of TSMC’s revenues got here from its smallest 5nm and 3nm nodes through the quarter, however it would reportedly keep on with its present low-NA EUV programs for its upcoming 2nm and 1.6nm nodes. Which may save TSMC some huge cash, nevertheless it might spell hassle for ASML. For 2025, analysts count on TSMC’s income and earnings to develop 24% and 27%, respectively.
TSMC produces its most superior chips in Taiwan, and it solely manufactures its older and bigger chips in China and different international locations. That diversification naturally insulates it from the tighter export curbs towards China, even when a few of its fabless clients are barred from delivery their most superior chips to Chinese language corporations.
The higher purchase: TSMC
ASML and TSMC each look fairly valued at about 23 instances ahead earnings. ASML continues to be a stable long-term funding within the semiconductor market, nevertheless it’s rising slower than TSMC, it is extra uncovered to the export curbs towards China, and it is not as broadly diversified. That is why I consider TSMC will stay a stronger chip inventory than ASML for the foreseeable future.
Leo Solar has positions in ASML and Apple. The Motley Idiot has positions in and recommends ASML, Superior Micro Units, Apple, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Idiot recommends Intel and recommends the next choices: brief November 2024 $24 calls on Intel. The Motley Idiot has a disclosure coverage.
