ASML vs. TSMC: What's the Better AI Buy in 2025?

The rising interest in artificial intelligence (AI) stocks has drawn many investors into this fast-growing sector. With many AI-related stocks seeing substantial gains recently, it can be challenging for investors to assess their potential for returns.

In this context, it is essential not to overlook two key players in the AI hardware market: TSMC and ASML. Each of these companies has a unique and vital role in the semiconductor manufacturing process, and their relationship is critical for AI development. However, when it comes to potential returns, one might be a better investment than the other.

The State of Two Businesses

ASML has traditionally held a leading position, particularly due to its exclusive technology in extreme ultraviolet (EUV) lithography, which is essential for creating the most advanced chips in the world. Although some new technologies developed by Japanese researchers could simplify EUV lithography and let competitors like Nikon and Canon enter this market, ASML still maintains its dominance for now.

This dominance is crucial for TSMC because it relies on ASML’s sophisticated equipment to produce cutting-edge chips. TSMC fabricates chips designed by industry leaders such as Nvidia, AMD, and Qualcomm. Even though TSMC faces competition from firms like Samsung and Intel, and there are political pressures prompting a shift of manufacturing to North America and Europe, TSMC still holds a commanding 62% share of the foundry market, as reported by TrendForce.

Comparing the Financials

Both ASML and TSMC have thriving businesses tied to the production of semiconductors for AI technologies, and both are expected to outperform the market over time. Yet, determining which one will provide the better return on investment largely hinges on their financial performance.

In the first three quarters of 2024, ASML reported sales of 19 billion euros (around $19.6 billion), reflecting a 6% decline year-over-year, attributed mainly to sluggish demand in China. Consequently, the company's net income dropped to 4.9 billion euros (approximately $5.0 billion) during this period, down from 5.8 billion euros in the same timeframe last year.

On the other hand, TSMC continues to grow, posting revenues of $63 billion for the first nine months of 2024—up by 32% from the previous year. Its expenses have risen at a similar pace, leading to an impressive consolidated income of $26 billion, which is a 33% increase compared to the same period last year.

Given this contrasting financial performance, TSMC has significantly outperformed ASML over the past year.

Interestingly, although ASML has a higher price-to-earnings (P/E) ratio of 39, compared to TSMC's 33, it's important to look at the historical averages for both companies. For the last five years, ASML's average P/E ratio has been 43, meaning it is currently relatively cheaper. Conversely, TSMC’s average ratio has been 24, suggesting it might suffer a retraction if market conditions deteriorate.

ASML or TSMC?

Choosing between these two AI stocks can be complicated due to their different valuations and market roles. Nevertheless, it seems that TSMC might offer greater potential for returns. The fact that TSMC relies on ASML more than the other way around adds an interesting dynamic to their relationship. Yet, the declining revenue at ASML suggests its current cheapness might be justified.

While a higher-than-average earnings multiple can indicate risk in investing in TSMC, a 33 times earnings multiple is fairly reasonable for an AI stock. The ongoing AI revolution should help TSMC achieve rapid revenue and earnings growth, potentially mitigating risks associated with its relative valuation premium and leading to stronger returns for investors over the long term.

The insights here aim to guide potential investors in their decision-making process.

ASML, TSMC, AI