Comparing Applied Materials and ASML for AI Investment

Artificial intelligence (AI) is rapidly becoming a significant industry, attracting attention from investors. A good way to capitalize on this trend is to invest in companies that play critical roles in the AI landscape. Two companies that stand out in this space are Applied Materials (AMAT) and ASML (ASML). Both companies provide essential equipment for manufacturing the microchips that enable AI technology and are among the largest suppliers of semiconductor manufacturing equipment in the world.

ASML specializes in lithography machines, which are used to transfer the designs of microchips onto silicon wafers. On the other hand, Applied Materials is recognized for its tools that are involved in various stages of the microchip production process, such as metrology and inspection systems that help ensure the chips are free from defects.

Both companies are crucial in the AI ecosystem, but if you had to select one, which company would be a better stock choice for AI investment?

Evaluating Applied Materials

Management at Applied Materials sees significant long-term growth opportunities due to ongoing trends in semiconductor technology. Several industries, including electric vehicles (EVs), robotics, renewable energy, and AI, heavily rely on semiconductors.

The tools offered by Applied Materials are expected to remain in demand as the needs for semiconductor manufacturing continue to evolve. For instance, manufacturers are now beginning to embrace Gate-All-Around (GAA) technology for making microchip transistors.

Currently, the Fin Field-Effect transistor design is prevalent, but GAA technology aims to enhance the overall performance, energy efficiency, and density of transistors.

In its 2024 fiscal year, which ended on October 27, Applied Materials reported $2.5 billion in revenue from GAA technology and anticipates that figure will double in fiscal 2025. Overall, the company's sales increased by 2% year-over-year in fiscal 2024, resulting in total revenues of $27.2 billion, marking five consecutive years of growth.

However, a recent analyst review from Morgan Stanley downgraded the company's stock, predicting weak demand may negatively impact revenue in 2025. This is partly due to U.S. government restrictions on semiconductor exports to China, which is a vital market for Applied Materials. Despite these challenges, the company forecasts fiscal Q1 sales to be around $7.2 billion, up from $6.7 billion a year earlier.

Examining ASML

ASML holds a significant position in the semiconductor industry as a key supplier of lithography equipment. Notably, it is currently the sole provider of advanced lithography technology, known as extreme ultraviolet (EUV) lithography. EUV machines are essential for manufacturing cutting-edge microchips that can deliver powerful yet energy-efficient AI capabilities.

This unique position gives ASML a competitive edge in the market. However, its stock experienced a decline following the release of third-quarter results on October 15. The company reported Q3 revenue of $7.5 billion, a 20% increase from the $6.2 billion reported in 2023, indicating robust growth. Nonetheless, the management provided an outlook that disappointed investors.

ASML expects to close fiscal 2024 with revenues of 28 billion euros, reflecting a slight increase from the previous year's 27.6 billion euros. Additionally, like Applied Materials, ASML is also facing challenges due to unfavorable macroeconomic conditions.

Management anticipates that the weak demand for semiconductors, apart from the AI sector, is likely to continue into 2025. CEO Christophe Fouquet noted that recovery in other market segments is taking longer than expected. This cautious outlook has resulted in ASML's shares dropping about 6% in 2024.

Despite these short-term hurdles, ASML's near monopoly in lithography equipment positions it well for future success, especially when the semiconductor market rebounds, which typically follows cyclical trends.

ASML's sales to the China market are projected to be about 20% of total revenue in 2025, maintaining a historical trend. Looking ahead, ASML expects revenues to reach between 44 billion euros and 60 billion euros by 2030.

Making a Choice Between ASML and Applied Materials

While the current economy poses short-term challenges for both Applied Materials and ASML, both companies are expected to benefit in the long run from increasing demand in sectors like AI and electric vehicles that rely on semiconductors. Therefore, investing in both companies may be a solid strategy.

However, if a choice must be made, Applied Materials emerges as the more attractive investment. The deciding factor is stock valuation. To compare, a look into each company's price-to-earnings (P/E) ratio is useful, as this metric indicates how much investors are willing to spend for each dollar of earnings.

Analyses indicate that both Applied Materials and ASML experienced a decrease in their P/E ratios throughout the year. Notably, Applied Materials currently has a substantially lower P/E multiple compared to ASML, suggesting that its shares offer better value.

Considering its stock valuation, alongside favorable long-term trends that could mitigate any decline in product sales to China, now could be an ideal time to consider investing in shares of Applied Materials.

This analysis does not reflect any positions in the stocks discussed.

AI, Investment, Semiconductors, Technology, Stocks