Taiwan Semiconductor vs. ASML Holdings: Which Stocks are a Better Buy?

Taiwan Semiconductor Manufacturing (TSM) and ASML Holding (ASML), two of the prominent players in the semiconductor manufacturing industry, have been able to capitalize on the pandemic due to the increased dependence of individuals and corporates on technology that require microchips to run.

Both the stocks generated significant returns over the past three years. While TSM returned 145% over this period, ASML gained 140%. In terms of year-to-date performance as well, TSM is a clear winner with 67% returns versus ASML’s 44.2%. But which of these stocks is a better pick now? Let's find out.

Business Structure and Latest Movements  

TSM is one of the world’s largest semiconductor manufacturers playing a pivotal role in the chip revolution. The company engages in the computer-aided design, manufacturing, packaging, testing, sale, and marketing of integrated circuits and other semiconductor devices. It also offers customer service, account management, and engineering services. The company serves its customers in the following segments – Computer, Communications, Consumer, and Industrial and Standard.

TSM developed the world’s first 7-nanometer (nm) chip, which powered Apple’s (AAPL), iPhone X. The ongoing work and learning from home trend enhanced sales of PCs, smartphones, and servers that use TSM’s chips. The company is also the key beneficiary of the iPhone 12 launch and the arrival of Sony’s (SNE) most recent PlayStation 5 and Microsoft’s (MSFT) Scarlett game console. Moreover, Phoenix City authorities have recently allowed TSM to set up a $12-billion chip manufacturing plant where production is scheduled to begin in 2024.

ASML is also one of the world’s leading manufacturers of chipmaking equipment. The company develops, produces, markets sells, and services advanced semiconductor equipment systems consisting of lithography related systems for memory and logic chipmakers. The company provides extreme ultraviolet (EUV) and deep ultraviolet (DUV) lithography systems comprising immersion and dry lithography solutions.

ASML has recently completed the acquisition of Berliner Glas Group, one of the world’s leading providers of optical key components, assemblies, and systems, high-quality refined technical glass as well as glass touch assemblies. Moreover, the company opened a Global EUV Training Center in Taiwan in August this year. This new training center features live EUV machine modules and comprehensive training courses to train EUV engineers.

Recent Financial Results

In the third quarter ended September 2020, TSM’s revenue surged 29.2% year-over-year to $12.14 million. EPS increased by almost 36% on a year-over-year basis to $0.90. Monthly net revenues for October 2020 increased by 12.5% compared to the same period last year.

The majority of TSM’s growth is coming from its 5nm and 7nm chips. The company’s business is significantly benefitting from the strong demand for its advanced technologies and specialty technology solutions, driven by 5G smartphones, HPC, and IoT-related applications.

ASML’s net sales for the third quarter grew 32.5% year-over-year. Sales of lithography systems for the quarter came in at 60 units, compared to the year-ago value of 57 units. Moreover, net bookings soared 160.5% sequentially. ASML’s EPS also exhibited strong growth, rising 69.8% year-over-year.

In its DUV business, ASML qualified the first TWINSCAN NXT:2050i in the last quarter, which is based on a new version of the NXT platform and includes new developments in the reticle stage, wafer stage, projection lens, and exposure laser. In ASML’s EUV business, the vast majority of the TWINSCAN NXE:3400B systems in the field have now been upgraded with productivity packages.

Here ASML is in an advantageous position.

Past and Expected Financial Performance

TSM’s revenue and EPS grew at a CAGR of 10.4% and 12.9%, respectively, over the past three years.

Analysts expect the company’s revenue to increase 18.6% in the current quarter, 34.3% in the current year, and 11.8% next year. TSM’s EPS is expected to grow 58.1% in the current year and 6.2% next year. Moreover, its EPS is expected to grow at a rate of 19.7% per annum over the next five years.

On the other hand, ASML’s revenue and EPS grew at a CAGR of 17.9% and 19.6%, respectively, over the past three years.

Analysts expect ASML’s revenue to increase 34.4% in the current quarter, 18.4% in the current year, and 13.3% next year. The company’s EPS is expected to grow by 30.5% in the current year and 26.5% next year. Moreover, ASML’s EPS is expected to grow at a rate of 22% per annum over the next five years.

ASML has an edge over TSM here as well.

Profitability      

TSM’s trailing-12-month revenue is 2.8 times of what ASML generates. Moreover, TSM is the most profitable with a gross profit margin of 52.14% versus ASML’s 47.43%.

Additionally, TSM’s ROE and ROA of 29.1% and 14% compare favorably with ASML’s 25.9% and 10.4%, respectively.

Valuation

In terms of forward P/E, ASML is currently trading at 46.92x, 56% more expensive than TSM which is currently trading at 30.08x. Moreover, TSM is less expensive in terms of trailing-12-month P/S (9.91x versus 11.22x), ASML’s forward PEG of 2.10x is 49% higher than TSM’s 1.41x.

In terms of trailing-12-month price/cash flow as well, ASML’s 43.37x is 159% higher than TSM’s 16.74x.

Though ASML looks much more expensive compared to TSM, it’s worth paying this premium considering ASML’s higher earnings growth potential.

POWR Ratings

Both TSM and ASML are rated “Strong Buy” in our proprietary POWR Ratings system. Here are how the four components of overall POWR Rating are graded for TSM and ASML:

Both TSM and ASML have an “A” for Trade Grade, Peer Grade, Buy & Hold Grade, and Industry Rank.

However, TSM is ranked #1 in the 86-stock Semiconductor & Wireless Chip group, while ASML is ranked #2 in the same industry.

The Winner

As 5G adoption increases in the coming quarters, the demand for smartphones, high-performance, automotive, and internet-of-things chips will rise. While both TSM and ASML are good long-term investments considering their user engagement and continued market expansion, ASML appears to be a better buy based on the factors discussed here.

While TSM is a relatively cheaper option to bet on the accelerating shift to visual computing and data center spending, ASML is growing rapidly and its premium valuation is justified as it has more room to grow its earnings.

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TSM shares were trading at $96.49 per share on Tuesday afternoon, down $1.64 (-1.67%). Year-to-date, TSM has gained 68.99%, versus a 14.32% rise in the benchmark S&P 500 index during the same period.

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies.

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