Taiwan Semiconductor Manufacturing vs. ASML Holding: Which Chip Stock is a Better Investment?

Taiwan Semiconductor Manufacturing Company Limited (TSM), in Hsinchu, Taiwan, and ASML Holding N.V. (ASML), in Veldhoven, the Netherlands, are two well-known companies in the global semiconductor industry. TSM manufactures and markets integrated circuits and semiconductor products. It provides wafer manufacturing, wafer probing, assembly, and testing, mask production, and design services. In comparison, ASML develops, sells, and services advanced semiconductor equipment systems, focusing on lithography-related systems worldwide. It caters mainly to the makers of memory chips and logic chips.

Amid a global chip shortage, the semiconductor industry witnessed 27.6% year-over-year sales growth in the third quarter. Governments and enterprises are working together to address the chip shortage and are making considerable investments in the industry to meet the rising demand from various sectors worldwide. Chipmakers’ ongoing efforts to manufacture advanced chips and major technological breakthroughs position the industry well for growth.

Investor optimism in this space is evident in the SPDR S&P Semiconductor ETF’s (XSD) 15.4% gains over the past month, versus the SPDR S&P 500 Trust ETF’s (SPY) 6.4% returns. The global semiconductor market is expected to grow at a 7.7% CAGR to $778 billion by 2026. So, both TSM and ASML should benefit.

But while TSM has gained 2.3% in price over the past month, ASML has surged 9.5%. ASML is also a clear winner with 122.3% gains versus TSM’s 33.1% returns in terms of their past year’s performance. But which of these stocks is a better pick now? Let’s find out.

Click here to checkout our Semiconductor Industry Report for 2021

Latest Developments

On October 26, 2021, TSM introduced its N4P process, the third major enhancement of TSM’s 5-nanometer technology family, which delivers an improved performance boost, power efficiency, and transistor density over the original N5 and N4 technology. Also, it lowers process complexity and improves wafer cycle time by reducing the number of masks. This breakthrough should help e TSM to secure widespread recognition across the industry.

On August 20, ASML opened its state-of-the-art R&D facility in Silicon Valley, California. The Silicon Valley team co-optimizes IC designs, photomasks, lithography, and metrology and inspection to enhance the manufacturability and yield of leading-edge semiconductors through its computational lithography and e-beam metrology and inspection expertise. ASML’s computational software and metrology and inspection will enable chipmakers to optimize the patterning process.

Recent Financial Results

TSM’s net revenue for its fiscal third quarter, ended September 30, 2021, increased 16.3% year-over-year to $14.88 billion. The company’s gross profit came in at $7.63 billion, up 11.7% from the prior-year period. Its income from operations increased 14% year-over-year to $6.14 billion. While its net income increased 13.9% year-over-year to $5.61 billion, its earnings per ADR increased 13.8% to $1.08. As of September 30, 2021, the company had $30.64 billion in cash and cash equivalents.

For the fiscal third quarter, ended October 3, 2021, ASML’s total net sales increased 32.4% year-over-year to €5.24 billion ($6.03 billion). The company’s gross profit came in at €2.71 billion ($3.14 billion), representing a 44.1% rise from the prior-year period. Its income from operations was  €1.92 billion ($2.22 billion), up 57.9% from the prior-year period. ASML’s net income came in at €1.74 billion ($2.01 billion), indicating a 63.9% rise from the year-ago period. Its EPS increased 68.4% year-over-year to €4.26. The company had €4.32 billion ($4.99 billion) in cash and cash equivalents as of October 3, 2021.

Past and Expected Financial Performance

TSM’s tangible book value and total assets have grown at CAGRs of 10% and 19.2%, respectively, over the past three years.

Analysts expect TSM’s EPS to increase 21.2% year-over-year in the current year and 20% next year. Its revenue is expected to increase 24.8% year-over-year in the current year and 30.2% next year. And the company’s EPS is expected to grow at a 15.8% rate per annum over the next five years.

In comparison, ASML’s tangible book value and total assets have increased at CAGRs of 2.8% and 12%, respectively, over the past three years.

ASML’s EPS is expected to rise 65.7% year-over-year in the current year and 21.7% next year. Its revenue is expected to rise 37.4% year-over-year in the current year and 17.3% next year. The stock’s EPS is expected to grow at a 29.8% rate per annum over the next five years.

Valuation

In terms of non-GAAP forward PEG, ASML is currently trading at 2.10x, which is 19.3% higher than TSM’s 1.76x. In terms of forward EV/Sales, TSM’s 9.41x compares with ASML’s 15.21x.

Profitability

TSM’s trailing-12-month revenue is almost 2.6 times higher than ASML’s. TSM is also more profitable, with a 68.3% EBITDA margin versus ASML’s 36.9%.

Also, TSM’s 37.9% net income margin compares favorably with ASML’s 30.5%.

POWR Ratings

While TSM has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, ASML has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.

Both TSM and ASML have a B grade for Momentum, which is in sync with their price gains over the past month. TSM has gained 2.3% over the past month, while TSM has returned 9.5% during this period.

In terms of Quality, TSM has been graded an A, which is consistent with its higher-than-industry profitability ratios. TSM’s 41.3% trailing-12-month EBIT margin is 352.8% higher than the 9.1% industry average. In comparison, ASML’s B grade for Quality is in sync with its relatively lower profit margins. The company has a 34.8% trailing-12-month EBIT margin, which is 281.5% higher than the 9.1% industry average.

Of the 99 stocks in the B-rated Semiconductor & Wireless Chip industry, ASML is ranked #55, while TSM is ranked #46.

Beyond what we have stated above, our POWR Ratings system has also rated TSM and ASML for Growth, Stability, Value, and Sentiment. Get all ASML ratings here. Also, click here to see the additional POWR Ratings for TSM.

The Winner

Increasing investments and government support to ramp up chip production, and breakthroughs in chip manufacturing, should help the semiconductor industry overcome the current chip shortage and grow substantially in the future. Both ASML and TSM are well-positioned to capitalize on the industry tailwinds. However, its relatively lower valuation and higher profitability we think make TSM a better buy here.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Semiconductor & Wireless Chip industry.

Click here to checkout our Semiconductor Industry Report for 2021

TSM shares were trading at $114.01 per share on Wednesday afternoon, down $0.10 (-0.09%). Year-to-date, TSM has gained 5.53%, versus a 25.51% rise in the benchmark S&P 500 index during the same period.

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.

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