Better Semiconductor Stock: TSMC vs. ASML

TSMC (NYSE: TSM) and ASML (NASDAQ: ASML) are both linchpins of the semiconductor market. Taiwan Semiconductor Manufacturing (TSMC) is the world's largest and most advanced contract chipmaker. ASML is the largest producer of lithography systems, which are used by TSMC and other foundries to optically etch circuit patterns onto silicon wafers. ASML is also the only producer of extreme ultraviolet (EUV) lithography systems which are used to manufacture the world's smallest and densest chips.

By adopting ASML's EUV systems at a faster rate than Intel (NASDAQ: INTC) and Samsung, TSMC pulled ahead in the "process race" to produce smaller chips. Today, most of the world's top fabless chipmakers -- including Nvidia (NASDAQ: NVDA), AMD, Apple, and Qualcomm -- outsource their production to TSMC. Over the past five years, TSMC's stock nearly tripled as ASML's stock more than doubled. Let's see why both stocks soared, and which one is the better overall investment right now.

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TSMC has plenty of irons in the fire

From 2020 to 2024, TSMC's annual revenue grew at a CAGR of 24% as its earnings per share (EPS) increased at a CAGR of 19%. That robust growth was driven by the market's strong demand for its 5nm chips, the mass production of its smaller 3nm chips, and the secular expansion of the high-performance computing (HPC) market, which included Nvidia's powerful data center GPUs for processing artificial intelligence (AI) applications.

TSMC's advanced packaging technologies also boosted its gross margins per chip, and it used AI to streamline its own process control and material handling technologies. It also built more overseas fabs to reduce its exposure to a potential military conflict between Taiwan and China.

In the third quarter of 2025, TSMC generated 60% of its revenue from its smallest 3nm and 5nm nodes. In terms of platforms, it generated 57% of its revenue from the HPC market, 30% from smartphone makers, and the rest from other industries. During that earnings report, TSMC lifted its full-year revenue guidance from around 30% growth to mid-30% growth. CEO C.C. Wei attributed that rosier outlook to the AI megatrend generating strong tailwinds for Nvidia and other AI chipmakers.

From 2024 to 2027, analysts expect TSMC's revenue to EPS to grow at a CAGR of 24% and 27%, respectively. Those are impressive growth rates for a stock that still trades at 19 times forward earnings. Its upcoming catalysts include the expansion of the AI market, the stabilization of the PC and smartphone markets, and the memory market's new growth cycle. Its newest 2nm node and its adoption of ASML's newest "high-NA" EUV systems -- which can produce even smaller chips -- should keep it far ahead of its rivals.

ASML faces more near-term challenges

From 2020 to 2024, ASML's revenue and EPS grew at a CAGR of 19% and 23%, respectively. It benefited from the same tailwinds as TSMC, but it also continued to sell its older deep ultraviolet (DUV) systems to producers of larger legacy chips.

ASML's EUV systems cost more than $200 million and require multiple planes to ship, while its smaller DUV systems still cost up to $90 million. Those price tags are steep, but ASML's dominance of that market gives it nearly unlimited pricing power. ASML also locks in its top customers like TSMC with recurring maintenance and service fees.

From 2024 to 2027, analysts expect ASML's revenue and EPS to increase at a CAGR of 11% and 18%, respectively. The expansion of the AI market, stabilizing sales of PCs and smartphones, and the memory market's upswing should boost its EUV shipments.

Howevver, its growth could be throttled by the tightening export curbs against Chinese chipmakers. ASML was already barred from exporting its EUV systems to China in 2019, but that ban could be expanded to cover its higher-end DUV systems. Therefore, its sales to mainland China (36% of its revenue in 2024) could dry up over the next few years.

Meanwhile, several of its top customers -- including TSMC -- are pushing their existing "low-NA" EUV systems to their limits before placing big orders for more high-NA EUV systems (which cost more than $400 million). Those delays could throttle its sales growth and disrupt its margin-boosting transition from low-NA to high-NA EUV systems. Its stock isn't cheap at 34 times next year's earnings, and it could face more near-term headwinds than TSMC.

The better buy: TSMC

TSMC and ASML are both solid long-term investments on the secular expansion of the semiconductor market. But if I had to pick one over the other right now, I'd stick with TSMC because it's more broadly diversified, it faces fewer regulatory headwinds, it's growing faster, and it trades at a lower valuation.

Leo Sun has positions in ASML and Apple. The Motley Fool has positions in and recommends ASML, Advanced Micro Devices, Apple, Intel, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: short November 2025 $21 puts on Intel. The Motley Fool has a disclosure policy.