ASML vs. TSM: Which Semiconductor Powerhouse Offers More Upside?

Core Insights - ASML Holding N.V. and Taiwan Semiconductor Manufacturing Company are critical players in the global semiconductor supply chain, with ASML specializing in extreme ultraviolet lithography systems and TSMC being the largest contract chipmaker globally [1][2] ASML Holding - ASML has a unique advantage in the chip equipment market as the only company capable of producing extreme ultraviolet lithography machines at scale, essential for manufacturing chips at 5nm, 3nm, and soon 2nm levels [3][4] - The company is rolling out next-generation High-NA EUV machines to meet the rising demand for smaller, more efficient chips, particularly driven by AI growth [4] - Despite its technological edge, ASML faces challenges from the ongoing U.S.-China trade war, which has led to export restrictions affecting its growth [5][7] - ASML's sales growth has slowed, with Q3 2025 revenues increasing by only 0.7% year over year, a significant drop from 23% in Q2 and 46% in Q1 [6] - The company has indicated that U.S.-China tariff discussions are negatively impacting customer capital spending timelines, potentially delaying orders and revenue recognition [7] Taiwan Semiconductor Manufacturing Company (TSMC) - TSMC dominates the semiconductor foundry space and has advanced production capabilities, already moving into 3nm production with plans for 2nm [8] - The ongoing AI boom has positioned TSMC for a multi-year growth cycle, with AI-related revenues tripling in 2024 and expected to double again in 2025 [9] - TSMC's Q3 2025 revenues surged 41% year over year to $33.1 billion, with earnings per share increasing by 39% to $2.92 [9][10] - To meet rising AI chip demand, TSMC plans to invest between $40 billion and $42 billion in capital expenditures in 2025, with 70% focused on advanced manufacturing processes [10][11] - TSMC faces near-term challenges from geopolitical tensions, particularly with significant revenue exposure to China, which could lead to export restrictions and supply-chain disruptions [12] - The company's global expansion strategy, including new fabs in the U.S., Japan, and Germany, may increase costs and reduce gross margins by 2-3 percentage points annually over the next three to five years [13] Comparative Analysis - TSMC is projected to have a steadier long-term growth profile compared to ASML, with revenue growth estimates of 33.7% and 20.6% for 2025 and 2026, respectively, and a non-GAAP EPS increase of 43.9% in 2025 [14] - ASML's revenue and EPS growth for 2025 are estimated at 23.2% and 39.3%, but are expected to decelerate significantly in 2026 [15] - Year-to-date, ASML shares have surged 61.6%, while TSMC shares have increased by 54.1% [16] - In terms of valuation, TSMC trades at 25.06 times forward earnings compared to ASML's 37.26 times, suggesting TSMC is more reasonably priced given its stronger growth outlook [17] Investment Outlook - Both companies are positioned to benefit from the AI-driven semiconductor investment cycle, but TSMC is currently viewed as the better investment option due to stronger near-term earnings stability and a more attractive valuation [19][20]