Taiwan Semiconductor Manufacturing vs. ASML: Which Stock Will Outperform in 2025?

Both Taiwan Semiconductor Manufacturing (NYSE: TSM) and ASML (NASDAQ: ASML) play critical roles in the semiconductor industry. Taiwan Semiconductor, or TSMC for short, is the world's leading semiconductor contract manufacturer. Given the cost to build manufacturing facilities (called fabs or foundries), the high capacity utilization needed for foundries to run profitably, and the technological expertise needed, most semiconductor companies prefer to just design chips and hire a third party to manufacture them. This is where TSMC fits in.

ASML, meanwhile, makes the equipment that companies like TSMC use to manufacture semiconductors. While it has competitors, it is considered to have a near monopoly on extreme ultraviolet (EUV) lithography, which are highly complex machines used to create advanced chips.

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This year, TSMC's stock has been the clear winner, up more than 90% as of this writing. ASML's stock, meanwhile, has fallen about 5% in 2024. Let's look at which stock could be set to outperform in 2025.

Both stocks are riding the chip boom

TSMC has been a big beneficiary of the overall proliferation of chips as well as the artificial intelligence (AI) infrastructure boom. The company's technological expertise has vaulted it to the forefront of advanced chip manufacturing. As such, the biggest chipmakers in the world, including Apple, Nvidia, and Broadcom, rely on it to manufacture their most advanced chips.

Surprisingly, the AI chip boom has not helped all chip manufacturers, as TSMC's biggest rivals, Intel and Samsung, have struggled. This has allowed the company not only to gain share, but also to exert strong pricing power. In turn, this led to a strong gross margin for TSMC.

TSMC saw strong growth this year, including seeing its third-quarter revenue jump 36% year over year to $23.5 billion. Meanwhile, its gross margin improved by 460 basis points sequentially to 57.8%, which helped lead to a 50% year-over-year increase in its earnings per American depositary receipt (ADR).

2025 is also setting up to be another good year for the company. According to Morgan Stanley, the company is set to nicely increase prices in 2025. Meanwhile, given the demand for AI and other chips, TSMC has been expanding to try to help companies like Nvidia keep up with demand. It also just announced its new fab in Japan had started mass chip production.

TSMC's expansion should presumably help ASML, as it is one of its big three customers along with Samsung and Intel for its newer technology. But the company has called 2024 a transition year as it moves to its next-generation high-NA EUV technology. This transition appears to have slowed some orders. TSMC, meanwhile, has also balked at the high price of the new ASML machines (prices range from $350 million to $380 million per machine), but it is now expected to receive a machine by year-end. However, it has said it doesn't need the technology for producing current high-end chips, and it looks like it won't use the machines for mass production until at least 2030.

Intel has been the company most receptive to ASML's new technology, being the first to get a new high-NA EUV technology machine, but its foundry business has struggled. Revenue fell for the segment last quarter, while losses have been mounting. The company is now in a bit of disarray following the retirement of its CEO in early December and reports it is looking to spin off its foundry business. As one of its big three customers, ASML could be affected.

Nearly half of ASML's revenue in 2024, meanwhile, has come from China. This is despite the fact that the company is prohibited from selling its newer chipmaking technology to the country. This is a big shift from recent years, as China was just 9% of its revenue in the fourth quarter of 2022. This could be the result of Chinese companies rushing to get equipment on fears that export bans could expand to even older technology.

While all this has led to some uncertainty surrounding ASML, the company is still basically a monopoly for high-end semiconductor equipment, and as chip production continues to grow, it should eventually benefit.

Image source: Getty Images.

Valuation and verdict

From a valuation standpoint, TSMC is the cheaper stock trading at a forward price-to-earnings (P/E) ratio of around 22, while ASML's forward P/E currently sits at 29. TSMC has also been growing its revenue more quickly, up 36% last quarter versus 12% growth for ASML.

TSM PE Ratio (Forward 1y) data by YCharts

While TSMC is the cheaper stock growing more quickly, I wouldn't count ASML out. The semiconductor equipment business can be a bit lumpy, but this is a company with a virtual monopoly on high-end chipmaking machines in a market that is seeing continued increasing demand for advanced AI chips. Over the long term, it is set to be a winner.

That said, for next year, TSMC edges it out as my pick. Fortunately, investors don't have to pick one or the other and can feel comfortable buying both for 2025.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML, Apple, Intel, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and recommends the following options: short February 2025 $27 calls on Intel. The Motley Fool has a disclosure policy.