ASML vs. Applied Materials: Which Chip-Equipment Stock Is the Better Buy?

Semiconductor manufacturers are planning huge expansions over the next few years to meet the booming demand for AI chips. Memory chipmakers hesitated to expand at first, but now have hundreds of billions of dollars worth of new facilities set to go into chip production starting next year. Meanwhile, the largest third-party chip manufacturer in the world, TSMC, has continuously raised its capital expenditure budget as it aims to keep up with demand.

While there are multiple ways to invest in the growing demand for semiconductor production, one of the best is to move up the supply chain to silicon wafer fabrication equipment makers. Two of the biggest companies in the space are ASML (NASDAQ: ASML) and Applied Materials (NASDAQ: AMAT). Both are excellent companies with strong competitive advantages, but if you can only choose one, which stock is worth buying today?

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Applied Materials: A diversified approach

Applied Materials holds a broad portfolio of equipment and maintains a very impressive market share across the group. Its deposition equipment (which adds conductive or insulating materials to a silicon wafer) is one of its fastest-growing businesses in 2026, even as it maintains a leading market share. The company is also seeing strong growth across etching, process diagnostics and control, and its thermals and treatments segments.

The diversified approach comes with a significant benefit. Applied Materials can sell combined offerings to customers by integrating different processes into a single piece of equipment. That can save its customers up-front costs as well as floor space, increasing production capacity. Over time, Applied Materials has come to work more closely with its customers, which has given it better insight into their needs.

Of course, maintaining a broad portfolio of market-leading equipment also requires significant investment in research and development (R&D). Applied Materials' R&D budget is significantly larger than its competitors' with much narrower product lines. That said, Applied Materials also earns revenue capable of supporting that R&D. Its operating margin of 31% is below that of competitors like KLA and Lam Research, but that's largely due to the lower-gross-margin profile of deposition equipment, which accounts for a larger share of Applied Materials' revenue.

In fact, the large R&D budget could ultimately benefit Applied Materials, as it enables the company to innovate quickly and stay ahead of competitors. Its leading position in deposition could enable it to gain market share in other equipment, especially through its integrated solutions. As a result, operating margin should expand over time, leading to very strong earnings growth.

ASML: The specialized near-monopoly

ASML makes lithography machines that print circuits on silicon wafers. It's an absolutely dominant force with about 90% of the total market for lithography equipment and technological capabilities that are years, if not decades, ahead of the next-closest competitor.

That lead is crucial, especially in the current period of rapidly expanding production capacity. ASML's machines last for up to 30 years. That means competitors hoping to catch up to ASML will miss out on sales during the current investment cycle, while ASML benefits from a growing installed base to service each year. ASML is working to take advantage of the situation by expanding its own capacity by 30% next year and a further 30% in 2028.

The move should produce very strong earnings growth for the business as it sells more high-end machines, which carry higher margins and higher service revenue. Even memory chipmakers (which are much less technologically advanced than logic chipmakers) are looking to use ASML's most advanced equipment. The expanded scale should also support higher operating margins.

Which stock should you buy?

Both companies are set to experience very strong growth over the next few years as sales climb and margins expand. ASML's dominant position in lithography means it can charge premium prices for its equipment, limited only by its customers' ability to produce meaningful returns on the capital invested. With the rising prices for both memory and logic chips fueled by AI demand, that trend is working very much in favor of ASML.

However, Applied Materials has the opportunity to expand its market share of higher-margin equipment as manufacturers expand capacity over the next few years by cross-selling and integrating equipment across its broad portfolio. That could ultimately position it for much stronger revenue growth over the long run, as its share gains tend to be sticky. There's no room for ASML to increase its market share.

The two stocks trade for similar forward P/E ratios around 40 times expectations over the next 12 months. If you go out to 2028, ASML trades for 23 times analysts' earnings-per-share expectations for the year, while Applied Materials trades for 21 times expectations. Given Applied Materials' ability to maintain a higher growth rate over the long run after the current investment cycle, it looks like the better buy right now.

Adam Levy has positions in Applied Materials and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends ASML, Applied Materials, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.