AI Chip Arms Race: ASML and Applied Materials Lead the Way

ASML and Applied Materials are leading equipment stocks poised for significant gains due to the demand for advanced chip technology. ASML's extreme ultraviolet lithography systems are crucial for producing cutting-edge AI accelerators, while Applied Materials provides key process technologies for high-performance AI chips with high-bandwidth memory. Both companies have large addressable markets and strong growth prospects, with ASML trading at a discount to its historical averages and a consensus price target of $923.80, a gain of more than 16%.

The semiconductor industry is experiencing a surge in demand for advanced chip technology, driven primarily by the growth of artificial intelligence (AI) workloads. Two leading equipment stocks, ASML and Applied Materials, are well-positioned to capitalize on this trend. This article explores the key factors that make these companies attractive investment opportunities.

ASML: The Leader in Extreme Ultraviolet Lithography

ASML is a Dutch company that specializes in extreme ultraviolet (EUV) lithography systems. These systems are crucial for producing cutting-edge AI accelerators, which require tiny circuit patterns to be printed onto silicon wafers. EUV technology allows for fine resolution, enabling the production of 5nm, 3nm, and 2nm transistors, which are essential for advanced AI applications [3].

ASML's leadership in EUV lithography positions it as a pure play on AI chip demand. The company's systems are in high demand from chipmakers like NVIDIA and AMD, which rely on ASML's technology to produce advanced GPUs and accelerators. ASML's large addressable market and strong growth prospects make it an attractive investment opportunity.

Applied Materials: Key Process Technologies for High-Performance AI Chips

Applied Materials is a U.S.-based company that provides key process technologies for high-performance AI chips with high-bandwidth memory. The company specializes in advanced equipment and software used to build semiconductor chips, including etchers, deposition systems, and process control software. Applied Materials' customers include industry giants such as TSMC, Samsung, and Intel, making it a central player across both the logic and memory segments of the chip market [1].

The generative AI wave is driving surging demand for semiconductors, and Applied Materials is well-positioned to capture a meaningful share of this investment. The company's revenues have risen at a healthy pace, growing at an annual rate of 13% over the last five years. If Applied grows its sales at an average annual rate of close to 22% for the next three years, its revenues could move from around $29 billion in FY’25 to around $53 billion by FY’28 or a roughly 81% increase [1].

Strong Growth Prospects and Valuation

Both ASML and Applied Materials have large addressable markets and strong growth prospects. ASML is trading at a discount to its historical averages, with a consensus price target of $923.80, a gain of more than 16% [3]. Applied Materials has also shown robust revenue growth and improving margins, with adjusted net margins growing from 19.6% in FY’19 to 26.5% in FY’24. If earnings grow 2.2x over the next few years, the P/E multiple could shrink to about 18x, translating into a roughly 2x growth in the stock price from $190 to about $380 within the next few years [1].

Conclusion

ASML and Applied Materials are leading equipment stocks poised for significant gains due to the demand for advanced chip technology. ASML's extreme ultraviolet lithography systems are crucial for producing cutting-edge AI accelerators, while Applied Materials provides key process technologies for high-performance AI chips with high-bandwidth memory. Both companies have large addressable markets and strong growth prospects, making them attractive investment opportunities for investors and financial professionals.

References

[1] https://www.nasdaq.com/articles/how-applied-materials-stock-can-surge-380
[2] https://finance.yahoo.com/news/why-citi-turning-more-bullish-150649530.html
[3] https://www.theglobeandmail.com/investing/markets/stocks/ASML/pressreleases/33346892/ai-chip-arms-race-3-must-watch-equipment-stocks/