Which Stock Between Taiwan Semiconductor Manufacturing and ASML is Likely to Surpass in 2025's Market Performance?
Which Stock Between Taiwan Semiconductor Manufacturing and ASML is Likely to Surpass in 2025's Market Performance?
Both Taiwan Semiconductor Manufacturing Company Ltd. (TSMC -0.70%) and ASML Holding NV (ASML -0.32%) play vital roles in the semiconductor sector. TSMC, often referred to as TSM for short, is the world's top semiconductor contract manufacturer. Due to the massive cost to establish manufacturing facilities (known as fabs or foundries), the need for high capacity utilization to run them profitably, and the intricate technological knowledge required, most semiconductor companies prefer to concentrate on chip design and outsource manufacture to a third party like TSMC.
On the other hand, ASML creates the tools that companies like TSMC use for semiconductor manufacturing. Although it has competitors, ASML is considered to have a near monopoly on extreme ultraviolet (EUV) lithography, complex machines used to create sophisticated chips.
So far in 2023, TSMC's stock has been the unquestionable victor, surging more than 90%. However, ASML's stock has dropped about 5% this year. Let's examine which stock might outshine in 2024.
Both stocks are riding the chip wave
TSMC has significantly benefited from the widespread adoption of chips and the artificial intelligence (AI) infrastructure boom. Thanks to its technological prowess, it has become a leader in advanced chip manufacturing. Major chip manufacturers, such as Apple, Nvidia, and Broadcom, rely on TSMC to manufacture their top-of-the-line chips.
Interestingly, the AI chip boom hasn't helped all chip manufacturers alike, with TSMC's biggest rivals, Intel and Samsung, experiencing difficulties. This has not only enabled TSMC to gain market share but also strengthen its pricing power. Consequently, this has positively impacted TSMC's gross margin.
In Q3 2023, TSMC reported strong growth, including a 36% year-over-year increase in third-quarter revenue to $23.5 billion. Furthermore, its gross margin improved by 460 basis points sequentially to 57.8%, which boosted earnings per American depositary receipt (ADR) by 50% year-over-year.
2024 is also shaping up to be a good year for TSMC. According to Morgan Stanley, TSMC is planning to hike prices in 2024. Moreover, due to the demand for AI and other chips, TSMC is expanding to help companies like Nvidia meet demand. It recently announced that its new fab in Japan had commenced mass chip production.
TSMC's expansion should likely benefit ASML, with it being one of its key customers for new technology along with Samsung and Intel. However, ASML has announced 2024 as a transition year as it moves to its next-generation high-NA EUV technology. This shift seems to have slowed some orders. TSMC, meanwhile, has expressed reservations about the high price of new ASML machines (ranging from $350 million to $380 million per machine), but is expected to receive a machine by the end of the year. However, it has stated that it doesn't need the technology for producing current high-end chips, and it appears that mass production will not commence before at least 2030.
Intel has been the most receptive to ASML's new technology, being the first to get a high-NA EUV technology machine. However, Intel's foundry business has underperformed recently, with revenue dipping in its most recent quarter and losses mounting. Intel is now going through a period of uncertainty following the retirement of its CEO in early December and plans to spin off its foundry business. ASML, as one of its major customers, could potentially be affected by these developments.
A significant portion of ASML's revenue in 2023 has come from China, despite the company's prohibition on selling its advanced chipmaking technology to China. This represents a major shift from recent years, as China accounted for just 9% of ASML's revenue in the final quarter of 2022. This could be a result of Chinese companies rushing to acquire equipment due to fears that export bans might expand to older technology.
Despite these uncertainties, ASML remains a virtual monopoly in the high-end semiconductor equipment market, and as chip production continues to grow, it should ultimately benefit.
Valuation and final thoughts
From a valuation perspective, TSMC's stock is cheaper, trading at a forward price-to-earnings (P/E) ratio of around 22, while ASML's forward P/E ratio currently sits at 29. In addition, TSMC has been posting faster revenue growth, recording 36% growth last quarter versus 12% growth for ASML.
However, despite being the cheaper and faster-growing stock, I would not discount ASML entirely. The semiconductor equipment business can be volatile, but ASML has a virtually insurmountable advantage in high-end chipmaking machines in a market that is experiencing escalating demand for advanced AI chips. Over the long term, it is likely to be a winner.
That being said, for 2024, TSMC is my pick for outperformance, but investors shouldn't dismiss ASML altogether. Investors may opt to buy both for 2024 without feeling the need to choose one over the other.
In the realm of semiconductor finance, TSMC's success is partly due to its strategic investments in advanced AI infrastructure, which has significantly boosted its revenue and gross margin. (investing, money, finance)
Given ASML's near monopoly in EUV lithography technology and its substantial revenue contribution from China, it continues to hold a strong position in the high-end semiconductor equipment market. (investing, money, finance)