ASML vs. TSMC: What's the Better AI Buy in 2025?

As the artificial intelligence (AI) boom continues to drive demand for advanced chips, two companies have emerged as critical players in the semiconductor industry: ASML (ASML -0.67%) and Taiwan Semiconductor Manufacturing (TSMC) (TSM 0.60%). Both companies play essential roles in manufacturing the hardware that makes AI possible, but which one is the better investment for 2025? Let's dive into the financials, market share, and growth prospects of both companies to determine the better AI buy.

Financial Performance in 2024

In the first three quarters of 2024, ASML reported a 6% yearly decline in revenue, primarily due to slowing demand in China. Analysts blame this pullback for the company's net income, which dropped to 4.9 billion euros ($5.0 billion) in the first nine months of the year, down from 5.8 billion euros in the same year-ago period.

In contrast, TSMC remains in growth mode, with its $63 billion in revenue for the first nine months of the year up 32% yearly. Expense growth roughly stayed in line with revenue, so its comprehensive income of $26 billion for the first three quarters of 2024 surged 33% higher over the previous 12 months.



Valuation and Market Share

Despite their divergent financials, both ASML and TSMC have relatively high P/E ratios, with ASML at 39 and TSMC at 33. However, investors should consider the valuation history of both stocks. ASML has had an average P/E ratio of 43 for the last five years, making it comparatively cheap at the moment. Conversely, TSMC has averaged a 24 earnings multiple over the same timeframe, signaling it could pull back if business conditions worsen.

In terms of market share, TSMC has established a technical lead in chip production, allowing it to claim 62% of the foundry market, according to TrendForce. This factor alone probably makes it indispensable, despite political pressures. ASML, on the other hand, has a near monopoly on extreme ultraviolet (EUV) lithography, which is crucial for manufacturing the world's most advanced chips. This dominance makes TSMC dependent on ASML to provide the equipment that allows it to make the world's most advanced chips.

Growth Prospects and Risks

Both companies are well-positioned to capitalize on the growing demand for AI chips. However, they face potential risks and challenges that could impact their respective stock performances.

ASML's technological dominance could be challenged if competitors like Nikon and Canon successfully enter the EUV lithography market. Additionally, slowing demand in China and export curbs on its sales to Chinese chipmakers could limit ASML's growth potential. On the other hand, TSMC faces geopolitical risks due to its heavy concentration of facilities in Taiwan and technological challenges if it hesitates to adopt ASML's new high-NA EUV technology.



Conclusion: TSMC Edges Out ASML for 2025

While both ASML and TSMC have strong market positions and growth prospects, TSMC's lower valuation, rapid revenue growth, and dominant market share in the foundry market make it the better AI buy for 2025. However, investors should not overlook ASML's long-term potential, as its virtual monopoly on high-end chipmaking machines in a market with increasing demand for advanced AI chips sets it up for success in the long run.

In summary, TSMC's strong financial performance, lower valuation, and dominant market share make it the better AI buy for 2025. However, investors should consider both companies as part of a diversified portfolio to capitalize on the growing demand for AI chips.