Investing in Artificial Intelligence: Comparing Applied Materials and ASML

Artificial intelligence (AI) is rapidly expanding and represents a significant investment opportunity. One approach to engage in this sector is to purchase shares in companies that are vital to the AI ecosystem. Two noteworthy companies in this field are Applied Materials (AMAT) and ASML (ASML). Both companies provide essential equipment used to manufacture microchips that enable AI functionality, making them leading suppliers in the semiconductor equipment market.

ASML focuses on producing lithography machines that project microchip designs onto silicon wafers. In contrast, Applied Materials specializes in tools used for various other stages in the microchip production process, including metrology and inspection systems to ensure the chips are flawless.

While both companies are integral parts of the AI infrastructure, which one stands out as the superior investment?

Pros and Cons of Applied Materials

Management at Applied Materials views promising long-term growth opportunities due to broad trends in semiconductor technology. Semiconductors are now integral to a variety of sectors, including electric vehicles (EVs), robotics, renewable energy, and, of course, AI.

The demand for the company's products is expected to remain strong as advancements in technology necessitate more specialized manufacturing equipment. For instance, semiconductor manufacturers are increasingly adopting Gate-All-Around (GAA) technology for creating microchip transistors.

While the Fin Field-Effect transistor architecture is currently prevalent, GAA technology represents the next step forward. Its development aims to enhance the performance, energy efficiency, and compactness of transistors.

Applied Materials reported $2.5 billion in revenue from GAA technology for its fiscal year ending on October 27, 2024, and it projects that this figure will double in fiscal 2025. Additionally, the company’s total sales saw a 2% year-over-year increase in fiscal 2024, reaching $27.2 billion, marking five consecutive years of growth.

However, a recent downgrade by a Morgan Stanley analyst hints at potential challenges ahead, predicting lower demand to impact the company’s revenue in 2025. A significant concern is U.S. government restrictions on semiconductor sales to China, which is a crucial market for Applied Materials.

Despite these challenges, the company anticipates its fiscal Q1 sales to hit approximately $7.2 billion, up from $6.7 billion the previous year.

Overview of ASML

ASML is a leading source of lithography equipment for the semiconductor industry and uniquely offers the cutting-edge extreme ultraviolet (EUV) lithography technology—a vital component for producing advanced microchips that power efficient AI systems.

This unique position gives ASML a considerable market edge. Nevertheless, the company's stock faced a decline following its third-quarter results announcement on October 15. ASML’s Q3 revenue was $7.5 billion, showing a 20% increase from $6.2 billion in 2023, reflecting robust growth. However, ASML’s management provided a less optimistic outlook for the future.

The company projects finishing fiscal 2024 with 28 billion euros in revenue, which is a slight increase over the previous year's 27.6 billion euros. Macroeconomic headwinds impacting Applied Materials are also affecting ASML.

Moreover, ASML's management foresees ongoing weak demand in the semiconductor market outside the AI sector, continuing into 2025. CEO Christophe Fouquet indicated that recovery in other market segments is taking longer than expected. This cautious outlook has contributed to a roughly 6% drop in ASML's shares throughout 2024.

Despite current headwinds, ASML's near monopoly in lithography technology positions it for success once the semiconductor market rebounds. Given the cyclical nature of this industry, a downturn is typically followed by a period of growth.

In 2025, ASML expects its revenue from the Chinese market to align with historical trends, making up about 20% of its total sales. Long-term forecasts suggest that ASML could see revenue soar between 44 billion euros and 60 billion euros by 2030.

Deciding Between ASML and Applied Materials

Current economic challenges may pose short-term difficulties for both Applied Materials and ASML, but over the long run, both companies are well-positioned to benefit from rising demand emanating from the AI, electric vehicle, and other semiconductor-dependent sectors. Therefore, investing in both might be sensible.

However, if a choice has to be made, Applied Materials stands out as the more attractive AI investment. The critical factor lies in stock valuation. To evaluate this, one can look at the price-to-earnings (P/E) ratio, a common measure that illustrates how much investors are willing to pay for earnings.

The current trend shows both Applied Materials and ASML experiencing reductions in their P/E ratios since the start of the year. Nonetheless, Applied Materials' P/E multiple is significantly lower than ASML's, indicating that Applied Materials shares might present better value.

Its attractive stock valuation, coupled with robust long-term trends that may mitigate potential sales declines in China, suggests that now is an opportune time to consider acquiring Applied Materials stock.

AI, Investing, Technology