Better Chip Stock: ASML vs. Applied Materials

Core Viewpoint - ASML and Applied Materials are two leading semiconductor equipment manufacturers, with ASML specializing in EUV lithography systems and Applied Materials offering a broader range of semiconductor manufacturing equipment and services. The performance of their stocks over the past few years has diverged, raising questions about which company presents a better investment opportunity [1][2][3]. ASML Overview - ASML is the sole supplier of high-end EUV lithography systems, essential for producing advanced semiconductor chips, and has a monopoly in this critical segment of the supply chain [4][5]. - The cost of ASML's EUV systems exceeds $150 million each, with next-gen high-NA EUV systems priced around $380 million, indicating a significant investment barrier for competitors [5]. - ASML's revenue growth was robust in recent years, with increases of 33% in 2021, 14% in 2022, and 30% in 2023, driven by demand from the PC, smartphone, and AI markets [7]. - However, ASML is facing challenges, including a projected revenue growth of only 2% in 2024 due to export restrictions to China and a cooling AI market, with an expected EPS decline of 4% [8]. - Analysts forecast a rebound in 2025, with revenue and EPS growth expected at 15% and 27%, respectively, while the stock is valued at 28 times next year's earnings [9]. Applied Materials Overview - Applied Materials provides a diverse range of semiconductor manufacturing equipment and services, but its revenue growth has slowed, with only 3% growth in fiscal 2023 and 2% in fiscal 2024, largely due to macroeconomic headwinds and export restrictions to China [10]. - China accounted for 37% of Applied Materials' total revenue in fiscal 2024, and scrutiny from the U.S. Department of Justice regarding its sales to Chinese firms has raised concerns [10][11]. - Despite these challenges, Applied Materials anticipates a growth resurgence driven by demand for advanced AI chips and energy-efficient technologies, with expected revenue and adjusted EPS growth of 9% and 10%, respectively, in fiscal 2025 [12][13]. Investment Comparison - ASML's stock has underperformed compared to Applied Materials due to its high valuation relative to growth potential, with a cautious outlook for 2025 impacting investor sentiment [14]. - Conversely, Applied Materials' stock has been pressured by concerns over its reliance on the Chinese market, but it may be undervalued if it can successfully diversify its customer base and capitalize on growth in other sectors [15]. - Overall, ASML's monopolization of the EUV market and lower exposure to China may position it as a more attractive investment compared to Applied Materials, despite the latter's potential for recovery [15].