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Generated Title: TSMC or ASML: One Is Clearly a Better Buy Based on Cold, Hard NumbersThe... Generated Title: TSMC or ASML: One Is Clearly a Better Buy Based on Cold, Hard Numbers
The Semiconductor Duopoly: Not All Growth Is Equal
TSMC and ASML: two giants straddling the semiconductor landscape. One, Taiwan Semiconductor Manufacturing (TSMC), the world's foundry king, churning out silicon for everyone from Apple to Nvidia. The other, ASML, holding a near-monopoly on the lithography tech—specifically, EUV—that enables TSMC's (and others') cutting-edge chip production. Both have seen their stocks soar, riding the wave of AI and HPC. But if you have to pick just one, which one offers the better risk-adjusted return? Let's dive into the numbers.
TSMC's revenue CAGR from 2020 to 2024 clocked in at 24%, with EPS growth a little behind at 19%. Not bad. ASML, during the same period, saw revenue and EPS grow at 19% and 23%, respectively. The initial take is that TSMC is growing faster on the top line, but ASML is converting revenue to profit more effectively.
But here's where the picture gets interesting. Looking forward, analysts predict TSMC's revenue and EPS to grow at 24% and 27%, respectively, from 2024 to 2027. ASML? A more modest 11% and 18%. That's a significant divergence. TSMC is not only bigger, but it's projected to accelerate its growth, while ASML slows down. Why?
The key, I suspect, lies in ASML's reliance on a small number of very large customers and the increasing geopolitical pressures. ASML already can't sell its most advanced EUV systems to China, and there's a looming threat of restrictions expanding to DUV systems, which accounted for 36% of their revenue in 2024. That's a big chunk of business potentially vanishing. TSMC, while also exposed to China, has a far more diversified customer base.
Then there's the issue of ASML's high-NA EUV systems. These things cost upwards of $400 million each. And TSMC, along with others, are reportedly pushing their existing low-NA EUV systems to the limit before shelling out for the next generation. This creates a potential bottleneck for ASML's revenue.
The Valuation Discrepancy
Now, let's talk valuation. TSMC trades at around 19 times forward earnings. ASML? A hefty 34 times. That's a massive premium for a company with slower projected growth and greater geopolitical risk. It's like paying twice as much for a car that's only going to go half as fast.
I've looked at hundreds of these filings, and this kind of valuation discrepancy for companies in the same industry is unusual, especially when you factor in the growth rates. It suggests that the market is either overestimating ASML's future potential, underestimating TSMC's, or both.
Another point to consider: dividend safety. While both companies offer a dividend, TSM shows slightly better numbers here. According to Seeking Alpha, TSM has a dividend yield of 1.07%. Looking at the grades, it earns a D- for safety, A+ for growth, C- for yield, and C+ for consistency. The dividend safety grade earns a D- because the cash dividend payout ratio is currently 44.2%, compared to the sector at 28.94.
TSMC's CEO, C.C. Wei, attributed the company's rosier outlook to the AI megatrend, specifically the strong tailwinds for Nvidia and other AI chipmakers. That makes sense. TSMC is the foundry. It doesn't matter who wins the AI chip race; TSMC gets paid regardless. They are, as Baron Durable Advantage Fund noted, "the ultimate picks and shovels supplier to AI."
ASML, on the other hand, needs those AI chipmakers to constantly upgrade their equipment. And with the export restrictions looming, a significant portion of their potential market is effectively cut off.
The Data Speaks for Itself
TSMC is the clear winner here. Faster growth, lower valuation, and less geopolitical risk. It's not even close. While ASML is undoubtedly a crucial player in the semiconductor ecosystem, its current valuation simply doesn't justify the risk. The market seems to be pricing in a future that may never materialize, especially with the increasing pressure on China. Sometimes, the best investment is the one that's simply priced more rationally.