TSMC vs. ASML: Which Is the Better Semiconductor Equipment Stock to Own for the Next 10 Years?

Two of the best semiconductor stocks on the market don't design and develop their own chips, they serve the entire industry, including most of the companies those that do design their own chips.

That's why Taiwan Semiconductor Manufacturing Company (NYSE: TSM), or TSMC, and ASML Holding (NASDAQ: ASML) might be the two best long-term semiconductor stocks.

But is one better than the other? Letʻs take a look.

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Both dominate their markets

TSMC is the leading chip foundry, which means it makes chips in bulk for other companies that design or deploy them, including behemoths like Apple, its largest customer, Nvidia, AMD, and Broadcom, to name some of the largest.

TSMC really has no peer as it owns 73% of the foundry market, a percentage that has been steadily rising. And in the more lucrative advanced or artificial intelligence (AI) chip space, it controls 90% of the market. Because of its scale and its advanced chip-making technologies, it has huge competitive production and pricing advantages that are hard to beat.

It's really the same story with ASML. ASML makes the lithography machines that are needed to make chips, so its biggest customers are the foundries like TSMC, its largest customer. Other large customers include foundries and chipmakers like Samsung, Intel, SK Hynix, and Micron.

Like TSMC, ASML dominates the market with a 90% market share in lithography and 100% market share for extreme ultraviolet equipment for advanced memory chips.

It controls the market with a massive technological advantage. Some analysts have suggested that it would take rivals some $100 billion in investment and 10 years of development to catch up to ASML, and that's assuming ASML stands still.

One stock has a slight advantage

You really cannot go wrong with either of these stocks. They might both be the best two semiconductor stocks to own, period. Because they are the singular choice of the entire universe of chipmakers, these pick-and-shovel providers to the AI boom should continue to thrive no matter who the players are.

The key will be holding on to their dominant market shares, but because of their technological advantages, the moats should stay intact for a long time.

One potential advantage I would give to TSMC is that they represent the gamut of chipmakers and designers, so they are not overly reliant on a small group of customers. ASML, on the other hand, is very much reliant on a few major players, TSMC chief among them. If that relationship fell apart, ASML would take a major hit -- bigger than if TSM lost its largest customer.

The other slight advantage I would give to TSMC is that it is considerably cheaper, trading at 36 times earnings and 25 times forward earnings. Further, its five-year price/earnings-to-growth ratio, or PEG ratio, is 1.01, which suggests it is a long-term value. A PEG ratio below 1 is considered a value based on its future earnings projections.

ASML is a tad more expensive, trading at 56 times earnings, 35 times forward earnings, with a PEG ratio of 1.98.

So, both stocks probably belong in your portfolio, but if I had to pick one right now, it would be TSMC.

Dave Kovaleski has positions in Micron Technology. The Motley Fool has positions in and recommends ASML, Advanced Micro Devices, Apple, Broadcom, Intel, Micron Technology, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.