Key Points
TSCM has a virtual monopoly on the manufacturing of advanced logic chips and is riding the AI infrastructure boom.
ASML has a monopoly on the EUV machines used to make AI chips and HBM.
- 10 stocks we like better than Taiwan Semiconductor Manufacturing ›
Two of the most important stocks in the semiconductor value chain today are Taiwan Semiconductor Manufacturing (NYSE: TSM) and ASML (NASDAQ: ASML). TSMC has a virtual monopoly on the manufacturing of advanced logic chips, such as graphics processing units (GPUs) and high-performance central processing units (CPUs), while ASML has a full-blown monopoly on the machines that make these chips possible.
I think both stocks look like solid long-term buys given their dominant positions within the semiconductor ecosystem, but if I could buy only one, it would be TSMC.
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Let's dive into both semiconductor stocks to see why I prefer TSMC.
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TSMC: The AI chip manufacturing leader
Nvidia has been the company leading the AI revolution with its GPUs, and its CEO, Jensen Huang, understands the importance that TSMC plays in the whole process. Last year, he called TSMC "one of the greatest companies in the history of humanity" while adding that "anybody who wants to buy TSMC stock is a very smart person."
Manufacturing advanced logic chips is a difficult task, and TSMC is the only company that has proven it can do it at high yields (producing chips with few defects) at scale. Rivals Samsung and Intel have both experienced struggles with yields, and it is why Huang warned Elon Musk that pulling off his TerraFab project is going to be very difficult.
TSMC's technological lead has given it a virtual monopoly in the space, making it a close partner with chip designers with whom it works closely to increase capacity to meet future chip demand. Future demand is so high that TSMC has been ramping up its own capital expenditure (capex) to increase capacity, which will drive strong future growth. The company's position has also afforded it strong pricing power, which has nicely lifted its gross margins and helped drive profitability.
The beauty of an investment in TSMC is that it generally benefits no matter which chip technology takes share, as it is the primary manufacturer of most types of advanced logic chips. This includes Nvidia and AMD GPUs, AI ASICs (application-specific integrated circuits), and central processing units (CPUs).
Trading at a forward price-to-earnings (P/E) ratio of 19 times 2027 analyst estimates, the stock is undervalued given its growth prospects and position in the semiconductor ecosystem.
ASML: A vital monopoly
ASML is arguably the most important company on the planet. It is the only company to have developed extreme ultraviolet lithography (EUV), and without its technology, it would not be possible to make advanced chips. That means not only would there be no AI boom but also no smartphones.
The company's EUV machines are used to make both advanced logic chips and high-bandwidth memory (HBM), a specialized form of DRAM (dynamic random access memory) that is packaged with GPUs and other AI chips to help optimize their performance. Right now, demand for AI accelerators, high-performance CPUs, and HBM is through the roof as is demand for its EUV machines.
The company will increase its own capacity by 30% this year and 30% in 2027. It is also looking to potentially bump it up by another 30% in 2028 as well.
While ASML plays an important role in the semiconductor ecosystem, it has not enjoyed the same revenue or gross margin boost as others in the space. In the second quarter, its revenue grew a solid 21% while its gross margins ticked up 30 basis points to 54%. However, compare that to TSMC whose Q2 revenue jumped by 34% while its gross margins ballooned by 910 basis points to 67.6%.
Trading at a forward P/E of 30.5 times 2027 analyst estimates, AMSL's valuation is reflective of its growth and strong positioning in the market. As such, I prefer TSMC, which currently looks undervalued while producing stronger growth.
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Geoffrey Seiler has positions in Advanced Micro Devices. The Motley Fool has positions in and recommends ASML, Advanced Micro Devices, Intel, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
