ASML vs. TSMC: Choosing the Best AI Stock for 2025

The surge in interest surrounding artificial intelligence (AI) stocks has drawn many investors into the market. With the promising potential for substantial returns, the increasing values of some AI-related companies can make it difficult for investors to assess their return prospects.

In the midst of this focus, it is easy for investors to overlook two companies that are crucial for producing the hardware essential to AI: ASML and Taiwan Semiconductor (TSMC). Each company has a distinct yet critical role in the chip manufacturing ecosystem, and while they rely on each other to some extent, one stands out as likely to provide greater returns.

The State of Two Businesses

Of the two, ASML has a marked advantage due to its foundational technology. It has essentially held a monopoly on extreme ultraviolet (EUV) lithography, which is vital for producing some of the world's most advanced chips.

Recently, researchers in Japan announced advancements that could simplify EUV lithography, potentially allowing companies like Nikon and Canon to enter ASML's territory with their expertise in deep ultraviolet (DUV) lithography. However, until significant alternatives are readily available, ASML is expected to retain its dominant position.

This dominance means TSMC must rely on ASML for the equipment necessary to manufacture cutting-edge chips. TSMC collaborates with industry giants like Nvidia, AMD, and Qualcomm to develop the chips needed for various applications.

While TSMC does face competition from players such as Samsung and Intel, it has established a significant technical lead in chip production, dominating 62% of the foundry market as reported by TrendForce. This dominance renders TSMC indispensable, even amid geopolitical pressures pushing for a shift of chip production closer to North America and Europe.

Comparing the Financials

Both ASML and TSMC have the potential to outperform the market in the long run, thanks to their positions in the semiconductor market, particularly for AI applications. However, assessing which company is better positioned for future gains largely comes down to their financial performance.

In the first three quarters of 2024, ASML reported revenue of €19 billion (approximately $19.6 billion), marking a yearly decline of 6%. Analysts attribute this drop to weakening demand from China, which has impacted ASML's net income as well, reducing it to €4.9 billion ($5.0 billion) compared to €5.8 billion during the same period last year.

On the other hand, TSMC continues to experience growth, with revenue amounting to $63 billion in the first nine months of the year, a 32% year-over-year increase. TSMC's expenses have remained proportional to its revenue growth, resulting in a comprehensive income of $26 billion, which is a 33% increase year-over-year.

The disparity in financial performance means TSMC significantly outperformed ASML over the past year.

Despite these contrasting returns, ASML sports a higher P/E ratio of 39 compared to TSMC's 33. Investors should take into account the valuation history for both companies. ASML's average P/E ratio over the last five years has been 43, making its current valuation appear relatively cheaper. In contrast, TSMC's average P/E of 24 indicates that its stock could see a decline if market conditions deteriorate.

ASML or TSMC?

Indeed, making a decision based on average valuations between these AI stocks proves challenging, but many analysts believe TSMC is more likely to yield better returns.

The fact that TSMC relies on ASML more than the reverse actually bodes well for ASML. However, TSMC's fluctuating revenue suggests that ASML may be priced lower for a reason.

Investing in TSMC despite its higher-than-average earnings multiple presents risks; however, a 33 P/E ratio is comparatively low for an AI-focused company. Moreover, the ongoing AI boom stands to benefit TSMC with accelerating revenue and earnings growth, making the relative premium on its valuation less daunting for investors and likely leading to superior returns down the line.

ASML, TSMC, AI