ASML(NASDAQ: ASML) And Applied materials(NASDAQ: AMAT) are two of the largest manufacturers of semiconductor equipment in the world. ASML is the world’s largest manufacturer of lithography systems, which are used to optically etch circuit patterns onto silicon wafers. It is the only supplier of high-quality extreme ultraviolet (EUV) lithography systems used to manufacture the world’s smallest, densest, and most energy-efficient chips.
Applied Materials offers a broader range of semiconductor manufacturing equipment, services and software for the foundry, logic and memory chip markets. It also sells production equipment for LCD and OLED screens. Both companies are seen as the hub of the semiconductor sector.
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But over the past three years, ASML shares fell 5%, while Applied Materials shares rose 15%. Let’s see why that happened, and whether Applied Materials continues to play the stronger semiconductor material than ASML.
ASML, based in the Netherlands, monopolizes an important link in the semiconductor market supply chain with its EUV systems. All leading foundries in the world, including Taiwanese semiconductor manufacturingSamsung, and Intel — must continue to buy ASML’s EUV systems to produce the world’s best chips.
These massive systems cost more than $150 million each and require multiple aircraft to ship. The next generation of high NA EUV systems, which are needed to produce even smaller chips, currently cost around $380 million. It took ASML decades to develop its EUV technology, so it won’t face any significant competitors in the near future.
Yet ASML’s growth is still accompanied by ebbs and flows in the cyclical semiconductor market. It is also highly exposed to the technology and trade war between the US and China, which has already banned it from selling its EUV systems and some of its older deep-ultraviolet (DUV) lithography systems to Chinese chip makers. It still generated 26% of its revenue from mainland China in 2023.
ASML’s revenue increased by 33% in 2021, 14% in 2022 and another 30% in 2023. That growth was driven by robust new PC sales during the pandemic (2020-2021), the 5G upgrade cycle in the smartphone market and the growth of the AI ​​market.
But for 2024, analysts expect sales to rise only 2% as the country grapples with tighter export restrictions against China and lags behind the AI ​​market’s initial growth spurt. It is gradually shipping its first high-NA EUV systems, but its top customers won’t yet use that advanced technology to produce their latest chips at scale. Earnings per share are expected to decline by 4%.
Analysts expect ASML’s revenue and earnings per share to grow by 15% and 27% in 2025 as the market warms up again. The stock seems fairly valued at 28 times next year’s earnings and pays a forward yield of 0.9%, but it’s not yet a bargain.
Applied Materials revenue rose 12% in fiscal 2022 (which ended October 2022), but grew only 3% in fiscal 2023 and 2% in fiscal 2024. Growth slowed as macroeconomic headwinds PC, smartphone, industrial and automotive sectors. markets. The stricter export restrictions also limited sales to China, which accounted for 37% of total sales in the 2024 fiscal year.
Additionally, over the past year, the U.S. Department of Justice (DOJ) has scrutinized past sales of equipment to top Chinese chip foundry SMIC. The US company’s heavy dependence on China also reportedly caused its application for CHIPS Act funding (for a $4 billion R&D center) to be rejected in July.
However, Applied Materials still expects growth to accelerate again as market demand for more powerful AI chips, new energy-efficient chips and denser memory chips increases. It plans to gradually reduce its exposure to China while engaging its customers with new integrated solutions that bring together multiple steps (such as material deposition, etching and material modification) into a single system. It also expects a new growth cycle for its smaller LCD and OLED businesses.
That’s why analysts expect Applied Materials’ revenue and adjusted earnings per share to grow 9% and 10%, respectively, in fiscal 2025. Based on these expectations, the shares look cheap at 17 times forward earnings and pay a dividend yield of 0.9%.
ASML has performed less well than Applied Materials in recent years because the company was overvalued relative to its growth potential. ASML’s bulls felt that its dominance of the crucial EUV market justified that premium valuation, but it lost its luster when growth leveled off in 2024 and it gave a cautious outlook for 2025. That said, the current valuation looks a little more attractive compared to the long term. growth potential in the long term.
Meanwhile, Applied Materials’ valuations have been under pressure due to concerns about the company’s future in China. But if you believe it can weather these headwinds and offset those pressures with growth in other markets, it may be undervalued at current prices. I wouldn’t be in a rush to buy any of these stocks, but I think ASML’s monopolization of the EUV market, lower overall exposure to China, and stronger growth rates still make it a more promising investment than Applied Materials.
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Leo Sun has positions in ASML. The Motley Fool holds 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 a disclosure policy.
Better Chip Stock: ASML vs. Applied Materials was originally published by The Motley Fool
