TSMC Outshines ASML: A Closer Look at Their Market Dynamics
ASML (NASDAQ: ASML) and Taiwan Semiconductor Manufacturing (NYSE: TSM), or TSMC, are integral parts of the global semiconductor landscape. ASML leads the world in producing photolithography systems that etch circuit patterns onto silicon wafers. Meanwhile, TSMC, utilizing ASML’s systems, holds the title of the largest and most technologically advanced contract chipmaker worldwide.
Image source: Getty Images.
Without ASML, companies like TSMC, Samsung, and Intel would struggle to produce their most sophisticated chips. If these foundries stall, the global semiconductor supply could be severely impacted.
This connection has led investors to view ASML and TSMC as key indicators of the semiconductor sector. Over the past year, ASML’s stock has risen about 10%, while TSMC’s shares have more than doubled. Let’s explore the reasons behind TSMC’s significant outperformance and whether it can sustain this momentum.
ASML’s Challenging Recovery Ahead
In 2022, ASML recorded a revenue increase of 14%, followed by a robust 30% rise in 2023. This growth was largely fueled by the booming artificial intelligence (AI) market and the competitive race among foundries to create smaller, advanced chips.
However, ASML anticipates stagnant revenue growth in 2024 as it navigates past the surge brought on by AI, tighter export restrictions affecting Chinese chipmakers, and the shift from its older “low-NA” EUV systems to newer, costlier “high-NA” EUV systems.
Initially, ASML projected a 43% revenue increase in 2025 through the ramp-up of high-NA EUV system shipments, priced at $380 million each compared to the $180 million for low-NA systems. Recent updates from ASML have revised this forecast to a modest growth of 7%-25%. Analysts, however, predict a rise of 25% in revenue and 44% in earnings for 2025.
The company noted that the slower recovery stems from the industry’s cautious shift to high-NA EUV systems. TSMC and Samsung remain focused on fully utilizing their current low-NA systems, only recently placing orders for high-NA models. Intel, having ordered its high-NA EUV systems earlier, could alter its strategy depending on its own business restructuring.
Additionally, many chipmakers are prioritizing the production of advanced AI chips using existing technology rather than investing in expensive newer lithography systems. The export restrictions on ASML’s advanced systems to Chinese manufacturers are further complicating the landscape.
TSMC’s Positive Outlook
TSMC saw its revenue surge by 34% in 2022 but then faced a 9% decline in 2023 due to the deceleration in the PC market, the conclusion of the 5G smartphone upgrade cycle, and challenges within the data center sector.
In a positive turn, TSMC increased its full-year revenue forecast in its latest quarterly earnings report, adjusting it from “mid-20s” growth to “nearly 30%.” Analysts had anticipated growth rates of 26% and 27% for revenue and earnings, respectively.
TSMC attributes this robust growth to the expanding AI market and the stabilization of both PC and smartphone sectors. In its latest quarter, it generated over half of its revenue from the high-performance computing (HPC) segment, which includes chips from Nvidia and AMD. The smartphone sector, involving companies like Qualcomm and Apple, contributed 34% of revenue.
More than half of TSMC’s revenue came from its most advanced 5nm and 3nm nodes. However, it plans to continue using its existing low-NA EUV systems for upcoming 2nm and 1.6nm nodes, which may lead to significant savings but poses challenges for ASML. Analysts project revenue and earnings growth for TSMC of 24% and 27%, respectively, in 2025.
Operating primarily in Taiwan for its most advanced chips while manufacturing older models in China minimizes TSMC’s risks from tighter export restrictions against China, although some of its fabless customers may face shipping hurdles.
Investment Considerations: Choosing TSMC
Currently, both ASML and TSMC are valued at approximately 23 times their forward earnings. ASML remains a solid investment within the semiconductor market; however, it is experiencing slower growth and has more exposure to export restrictions than TSMC.
Should You Invest $1,000 in ASML Right Now?
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Leo Sun has positions in ASML and Apple. The Motley Fool has positions in and recommends ASML, Advanced Micro Devices, Apple, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and advises shorting November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Nasdaq, Inc.
