ASML (Nasdaq: ASML) and Applied materials (NASDAQ:AMAT) They are two of the largest manufacturers of semiconductor equipment in the world. ASML is the world’s leading producer of lithography systems, which are used to optically etch circuit patterns onto silicon wafers. It is the only supplier of advanced UV (EUV) lithography systems used to manufacture the smallest, densest and most energy-efficient chips in the world.
Applied Materials provides a broad range of semiconductor manufacturing equipment, services and software for the foundry, logic and memory chip markets. It also sells LCD and OLED screen manufacturing equipment. Both companies are staples of Semiconductor sector.
But over the past three years, ASML stock has fallen 5% while Applied Materials stock has risen 15%. Let’s see why this happened, and whether Applied Materials remains ASML’s strongest semiconductor equipment.
ASML, headquartered in the Netherlands, has a monopoly on a key supply chain link in the semiconductor market through its UV systems. All the world’s leading foundries – incl Taiwan Semiconductor Manufacturing Co., LtdSamsung, and Intel – The need to continue purchasing ASML EUV systems to produce the best chips in the world.
These massive systems cost more than $150 million each and require multiple aircraft to be shipped. The cost of its next-generation high-NA EUV systems, which are required to produce smaller chips, is currently about $380 million. It has taken decades to develop ASML’s UV technology, so it will not face any real competitors for the foreseeable future.
However, ASML’s growth continues to ebb and flow with the cyclical semiconductor market. It is also highly exposed to the technology and trade war between the United States and China, which has already prevented it from selling its UV and some older deep-UV lithography systems to Chinese chipmakers. It still generates 26% of its revenue from mainland China in 2023.
ASML’s revenues rose 33% in 2021, 14% in 2022, and another 30% in 2023. This growth was driven by strong sales of new PCs during the pandemic (2020-2021), the 5G upgrade cycle in the smartphone market, and Artificial intelligence market.
But for 2024, analysts expect its revenue to rise just 2% as it faces tougher export restrictions against China and sees the AI market’s initial growth spurt. It is gradually shipping its first high-NA EUV systems, but its largest customers won’t be using this cutting-edge technology to mass-produce their latest chips just yet. Earnings per share are expected to decline by 4%.
In 2025, analysts expect ASML’s revenue and earnings per share to grow 15% and 27% as the market heats up again. Its shares appear to be worth a reasonable 28 times next year’s earnings and pay a forward yield of 0.9%, but it’s not a screaming bargain yet.
Applied Materials’ revenue rose 12% in fiscal 2022 (which ended October 2022), but it grew just 3% in fiscal 2023 and 2% in fiscal 2024. Its growth slowed due to macro headwinds that slowed computers and phones Smart, industry and automobile. Markets. Tight export restrictions also reduced its sales to China, which accounted for 37% of its total revenue in fiscal 2024.
Furthermore, the US Department of Justice has been scrutinizing Applied Materials’ past sales of equipment to China’s largest chip foundry, SMIC, over the past year. The US company’s heavy reliance on China reportedly caused its application for CHIPS Act funding (for a $4 billion research and development center) to be rejected last July.
However, Applied Materials still expects to grow Speed up again With the market demand for more powerful AI chips, new energy-efficient chips, and denser memory chips rising again. It plans to gradually reduce its exposure to China while providing its customers with new integrated solutions that integrate multiple steps (such as material deposition, etching, and material modification) into a single system. It also expects a new growth cycle for the smaller LCD and OLED business.
That’s why analysts expect Applied Materials’ revenue and adjusted EPS to grow 9% and 10%, respectively, in fiscal 2025. Based on those forecasts, its stock looks cheap at 17 times forward earnings and pays a forward dividend yield of 0.9%.
ASML has underperformed Applied Materials over the past few years due to its value being overvalued relative to its growth potential. ASML bulls believe its dominance of the crucial EUV market justifies this premium valuation, but it has lost its luster as its growth flattens in 2024 and it issued a cautious forecast for 2025. However, its current valuation looks a bit more attractive compared to its long-term value. – Growth potential in the long term.
Meanwhile, Applied Materials’ valuations have come under pressure on concerns about its future in China. But if you think it can weather those headwinds and offset that pressure through its growth in other markets, it may be undervalued at its current prices. I wouldn’t rush into buying any of these stocks, but I think ASML’s monopoly on the UV market, its lower overall exposure to China, and its stronger growth rates still make it a more promising investment than Applied Materials.
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Liu Sun He has positions at ASML. The Motley Fool has positions in and recommends ASML, Applied Materials, Intel, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: Short February 2025 $27 calls on Intel. The Motley Fool has Disclosure policy.
Best Chip Stocks: ASML vs. Applied Materials Originally published by The Motley Fool