Both semiconductor titans are poised to benefit from the AI boom, but which one should you put your money on right now?
gave PHLX Semiconductor Sector The index has been in roaring form in the market over the past one year, as of this writing it has posted a stunning 60% gain and handsomely outpaced returns of 28%. S&P 500 The index has delivered during the same period.
Artificial intelligence (AI) has played a central role in this tremendous growth as the demand for the chips necessary for training and inferring AI models has grown exponentially. Consequently, key industry players viz Taiwan Semiconductor Manufacturing (TSM 1.68%) And ASML Holding (ASML 0.81%) Has benefited tremendously. Shares of the Taiwanese semiconductor giant, known as TSMC, are up 85% in the past year, while ASML is sitting on a 53% gain.
Both companies are playing a central role in the AI chip market. However, if you had to choose just one of these two semiconductor stocks to take advantage of the AI boom, which one should you buy? Let's find out.
The case of TSMC
TSMC is the world's largest semiconductor foundry with a market share of 62% in the first quarter of 2024. It is ahead of the second largest foundry, Samsung, which has a market share of 13%, by a large margin. TSMC's commanding lead in the foundry market means it's the perfect choice for fabless chipmakers (who only design their own chips but outsource manufacturing to foundry partners like TSMC) because of the strong demand for AI chips. Want to get the most out of it.
Moreover, TSMC's foundry market share has grown due to AI-driven demand. Its market share increased by three percentage points on a year-on-year basis in Q1. Allied Market Research estimates that the semiconductor foundry market could generate annual revenue of over $231 billion in 2032, more than double the $106 billion it will generate in 2022.
There is a good chance that TSMC will continue to capture a larger share of this lucrative market and continue to outpace its competitors thanks to its advanced chip manufacturing processes that are powering AI applications. This is worth noting for top chipmakers such as Nvidia, IntelAnd AMD TSMC's foundries are being used to make AI chips.
Nvidia's popular H100 AI chip, for example, is based on TSMC's manufacturing node, and the graphics card specialist is also tapping the latter for its new Blackwell chips. Similarly, AMD's latest AI chips are based on TSMC's manufacturing node, and the chipmaker also plans to continue collaborating with the foundry giant for future chips.
TSMC's strong client base in AI chips bodes well for its future, as demand for AI chips is forecast to grow at a compound annual growth rate of around 30% through 2032, which is expected to drive the foundry market mentioned above. Development is left behind. As a result, there is a good chance that TSMC can lead the industry in which it operates.
The good news is that AI-driven demand has fueled TSMC's growth this year. Its revenue in the first five months of the year has grown by 27 percent compared to the same period last year. Analysts are forecasting TSMC's revenue to grow 23% to $85 billion in 2024, but its current pace of growth suggests it could do even better.
Throw in additional catalysts in the smartphone and personal computer (PC) markets, where AI is expected to drive strong sales growth, and it's easy to see why analysts have substantially raised their growth expectations for TSMC of late. Is. The company's 2024 earnings estimate has increased to $6.35 per share from $5.76 per share three months ago, a trend that could continue based on the discussion above.
TSMC, therefore, could continue to be the biggest beneficiary of the growing adoption of AI and continue to gain ground.
The case of ASML
The cutting-edge AI chips that TSMC develops for its clients would not be possible without ASML's machines. The Dutch semiconductor equipment giant's monopoly in the extreme ultraviolet (EUV) lithography space means that chipmakers and foundries like TSMC need to rely on ASML's offerings to make chips that are both powerful and powerful at the same time. I am
However, manufacturing chips at 7 nanometer (nm), 5nm, and 3nm nodes, which are used for AI applications, is only possible with ASML's machines. This explains why demand for its machines has been strong in recent years, allowing the company to build a solid backlog of orders that allows it to deliver healthy long-term growth.
More specifically, ASML was sitting on an order backlog of 38 billion euros at the end of the first quarter of 2024. That's higher than the company's full-year revenue forecast of 27.5 billion euros, corresponding to its 2023 sales. It's worth noting that ASML could turn more of its backlog into revenue in 2024 as it begins shipping its advanced chip-making machine that costs $380 million per unit.
More importantly, ASML is looking to expand its advanced machinery manufacturing capacity over the next few years. This is not surprising, as its customers such as TSMC want to build chips on even smaller process nodes to handle AI-related workloads. TSMC, for example, believes its 3nm process node could make $1.5 trillion worth of products over a five-year period.
As a result, there is a good chance that ASML will see its order book grow as its customers buy more of its machines to make more efficient chips. Unsurprisingly, the company's top line is expected to jump significantly in 2025 after this year's flat performance, a hangover from last year's weak semiconductor demand as its customers use current inventory levels. Work continues through.
ASML revenue estimates for current fiscal year data via YCharts
Thus, ASML could also become a top AI stock in the future and deliver stronger gains than last year. But is it a better buy than TSMC?
Decision
If we take a closer look at the valuation of these two companies, it becomes clear that TSMC is currently the cheaper of the two. TSMC has a trailing price-to-earnings (P/E) ratio of 34, which is significantly cheaper than ASML's multiple of around 55. Furthermore, TSMC's forward P/E ratio is 29, which is again much lower than ASML's multiple. 51.
Given that TSMC is growing at a faster pace than ASML and the shares are trading at a much more attractive price, these two seem to be better AI stocks to buy. However, it would be wise to keep a close eye on ASML as well, as its growth spurt thanks to its large backlog could propel its shares in the long term.