ASML vs. TSMC: Which AI Stock is the Better Buy for 2025?

The rise in artificial intelligence (AI) stocks has attracted a lot of investors to this sector. With the expected potential for returns and the recent increase in certain AI-related companies, figuring out which stocks might yield the best returns can be quite challenging.

In this context, investors might overlook two vital companies in the AI landscape: TSMC and ASML. They play different yet crucial roles in manufacturing, and although both depend on one another, only one seems set to provide potentially higher returns in the coming years.

The Business Landscape

Between the two, ASML holds a significant advantage due to its foundational technology. ASML has maintained a near-monopoly in extreme ultraviolet (EUV) lithography, which is essential for producing the world’s most advanced chips.

There are developments from Japan aimed at simplifying EUV lithography, which might allow firms like Nikon and Canon to enter ASML's market by capitalizing on the less advanced deep ultraviolet (DUV) lithography segment. However, until alternative technologies gain traction, ASML is likely to remain a dominant force.

TSMC, on the other hand, relies heavily on ASML, as it uses the equipment provided by ASML to manufacture advanced chips for companies like Nvidia, AMD, Qualcomm, and others.

Although TSMC faces competition from firms such as Samsung and Intel, it has found a solid footing with a 62% share of the foundry market, according to TrendForce. This position likely makes TSMC indispensable despite existing geopolitical pressures.

Financial Comparisons

Both ASML and TSMC have the potential to outperform the market over time thanks to their critical roles in the AI semiconductor space. However, determining which company might achieve better returns may boil down to financial performance.

For the first three quarters of 2024, ASML reported 19 billion euros (approximately $19.6 billion), marking a 6% decline year-over-year. Analysts link this decrease to weakening demand in China. Consequently, ASML's net income fell to 4.9 billion euros ($5.0 billion), compared to 5.8 billion euros in the same period last year.

Conversely, TSMC continues to demonstrate growth, with reported revenues of $63 billion in the first three quarters of 2024, reflecting a 32% year-over-year increase. The company’s expenses have grown at a rate comparable to its revenue, yielding a comprehensive income of $26 billion, up 33% from the previous 12 months.

The different trajectories in their financial performance reveal that TSMC has significantly outpaced ASML over the past year.

While ASML currently has a higher price-to-earnings (P/E) ratio of 39 compared to TSMC's 33, it's essential to consider the historical averages of both stocks.

Typically, ASML has enjoyed an average P/E ratio of 43 over the last five years, making its current valuation relatively low. Conversely, TSMC has averaged a P/E of 24 during the same period, which may suggest a higher risk of pullback if market conditions worsen.

Making a Choice: ASML or TSMC?

The differing valuation histories complicate the decision between these two stocks, but it appears that TSMC is more likely to offer higher returns to investors.

Given TSMC's higher dependency on ASML, one could argue that ASML is in a favorable position. Nonetheless, ASML's declining revenues raise questions about its future growth trajectory.

Investors paying a high multiples of earnings for TSMC face some risk. However, a P/E of 33 remains relatively reasonable for an AI stock, especially in light of the ongoing AI boom, which positions TSMC for rapid revenue and earnings growth. This dynamic may mitigate the risks associated with its current valuation, potentially yielding robust returns for investors in the future.

Will Healy has investment interests in AMD, Intel, and Qualcomm. Various positions are held in ASML, AMD, Intel, Nvidia, Qualcomm, and TSMC. Always review disclosure policies for the latest updates.

ASML, TSMC, AI