Better Artificial Intelligence Stock: ASML vs. Taiwan Semiconductor

Artificial intelligence (AI) has been a boon to the semiconductor industry. The need for faster, more powerful chips to fuel AI enabled the industry's sales to hit $627 billion in 2024, a 19% year-over-year increase.

Two companies critical to the production of semiconductor chips are ASML (NASDAQ: ASML) and Taiwan Semiconductor Manufacturing (NYSE: TSM), popularly known as TSMC. The former produces lithography equipment used in making microchips for AI. TSMC is one of its customers and a key chip manufacturer for businesses such as Nvidia.

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Given their crucial roles in the industry, does one win out as a better investment to capitalize on AI's growth? Let's dig into ASML and TSMC to find out.

Rationale for investing in ASML

ASML is a compelling investment because AI likely wouldn't exist without its lithography tools. The company's machines etch extremely fine patterns onto semiconductor wafers to create transistors and other circuit elements.

Moreover, ASML's latest innovation, extreme ultraviolet (EUV) lithography, is used to make the most advanced semiconductor chips available today. EUV also delivers another key benefit -- energy cost reduction.

AI systems require massive amounts of energy to operate, making them prohibitively expensive over time. ASML's machines enable the manufacturing of smaller, more advanced transistors. This allows for higher transistor density, creating more powerful chips in terms of computational performance per watt. In other words, you get more processing power for lower energy consumption.

ASML is the sole supplier of EUV lithography equipment. Despite the monopoly, ASML shares are down about 7% in 2024 through the week ended Dec. 20.

The decline was due to underwhelming guidance as the company noted a number of factors weighing on near-term earnings. Macroeconomic conditions are causing softer demand, and geopolitical tensions are limiting its access to the China market.

As a result, the company expects 2024 sales to come in at 28 billion euros ($29 billion), which is not much higher than the previous year's 27.6 billion euros ($28.7 billion). However, ASML believes growth in AI will contribute to reigniting the company's sales over the long term. It expects its revenue will rise to at least 44 billion euros ($45.8 billion) by 2030.

Arguments in favor of TSMC

TSMC is a customer of ASML and uses its EUV machines to produce semiconductor chips that employ three-nanometer (nm) process technology. The 3nm chips represent the latest frontier in semiconductor manufacturing, offering a significant leap in terms of performance and power efficiency.

These chips are crucial for AI, cloud computing, and more. However, they are extremely difficult to manufacture due to the complexities of controlling quantum effects at microscopic scales. TSMC has mastered 3nm manufacturing, giving it a significant advantage over competitors.

TSMC's 3nm-related revenue is growing quickly thanks to the benefits this technology affords AI systems. In the third quarter, TSMC's 3nm revenue represented 20% of its $23.5 billion in total sales, up from just 6% in the prior year. This growth coincides with the demand spurred by the onset of generative AI.

TSMC's 3nm sales are likely to continue expanding. The AI market is still in its infancy. Forecasts predict the industry will reach $827 billion by 2030, up from $136 billion in 2023.

This growth provides a tailwind to TSMC. In fact, the company's 2024 year-to-date sales through the end of November are up 32% from 2023. As a result, Q4 revenue is expected to hit at least $26.1 billion, a substantial jump up from the prior year's $19.6 billion.

Picking between ASML and TSMC stocks

ASML and TSMC have a symbiotic relationship. As sales of TSMC's 3nm chips increase, it may turn to ASML to purchase more equipment to support its sales growth. So both stocks are worth owning.

But since we're deciding between the two, the better AI investment choice right now is TSMC. A key factor is the stock's valuation. Here's a look at their price-to-earnings (P/E) ratio, which tells you how much investors are willing to pay for a dollar's worth of earnings.

Data by YCharts.

Although TSMC's share price increased 90% in 2024 through the week ended Dec. 20, the chart reveals that the stock's P/E multiple remains lower than ASML's, indicating TSMC shares are a better value.

TSMC is also the manufacturer of chips for some of the largest businesses in the world. Along with Nvidia, customers include Amazon-owned cloud leader Amazon Web Services (AWS), which is looking to TSMC to build a custom AI chip using 3nm technology.

Taiwan Semiconductor is well-positioned to capitalize on the AI industry's expansion over the long term. The firm is estimated to manufacture 95% of the world's advanced chips for AI. Given this market share, it's no wonder tech giants rely on TSMC for chips. These factors make it a great stock to add to your portfolio.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Robert Izquierdo has positions in Amazon, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends ASML, Amazon, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.