In this article, I evaluated two semiconductor stocks, ASML Holding N.V. (ASML) and Applied Materials, Inc. (AMAT), to determine which stock will drive portfolio growth. We believe AMAT is the better investment for reasons explained throughout this piece.

The rising penetration of digital technologies and the rising adoption of various consumer electronics across the globe are fostering the semiconductor market’s growth. Also, the growing demand for semiconductors in the industrial equipment and automotive sector has significantly contributed to the increased consumption of semiconductors.

According to the Precedence Research report, the global semiconductor market is projected to reach nearly $1.14 trillion by 2033, growing at a CAGR of 7.6% during the forecast period (2024-2033).

Furthermore, the growing integration of generative AI fuels the demand for high-performance Graphics Processing Units (GPUs). Deloitte predicts that the market for specialized semiconductors that fuel generative AI will exceed $50 billion this year. Meanwhile, the global GPU market is expected to reach $206.95 billion by 2029, growing at a 32.7% CAGR.

Additionally, the Semiconductor Industry Association (SIA) announced global semiconductor industry sales totaled $47.60 billion during January 2024, an increase of 15.2% year-over-year to $41.3 billion.

Besides, the U.S. government plans to spend $11 billion on semiconductor-related research and development and will launch the $5 billion National Semiconductor Technology Center.

The semiconductor industry’s bright prospects will likely benefit ASML and AMAT significantly.

AMAT is a clear winner in one-month price performance, with a 1.4% gain compared to ASML’s 2.3% decline. AMAT climbed 37.4% over the past three months compared to ASML’s 34.9% gain. In addition, AMAT gained 43.4% over the past six months, while ASML surged 56%.

Here are the reasons why we think AMAT could perform better in the near term:

Recent Developments

On February 26, 2024, AMAT announced a portfolio of products and solutions designed to address the patterning requirements of chips in the “angstrom era.” AMAT introduced innovative etch systems, CVD patterning films, and metrology solutions to enhance chips using EUV and high-NA EUV lithography.

AMAT also collaborates with cutting-edge logic chipmakers on many Sculpta applications.

Recent Financial Results

For the fourth quarter that ended December 31, 2023, ASML’s total net sales increased 12.6% year-over-year to €7.24 billion ($7.70 billion). Its net income grew 12.6% from the year-ago value to €2.05 billion ($2.18 billion). Its net income per ordinary share came in at €5.20, an increase of 13% year-over-year.

However, as of December 31, 2023, the company’s cash and cash equivalents stood at €7.01 billion ($7.46 billion), compared to €7.27 billion (7.74 billion) as of December 31, 2022.

During the first quarter that ended January 28, 2024, AMAT reported net sales of $6.71 billion. Its non-GAAP gross profit increased 1.9% year-over-year to $3.21 billion. The company’s non-GAAP net income and non-GAAP EPS came in at $1.78 billion and $2.13, up 3.4% and 4.9% from the prior year’s quarter, respectively.

In addition, the company’s non-GAAP free cash flow increased 5.7% from the year-ago value to $2.10 billion. Its cash and cash equivalents were $6.85 billion as of January 28, 2024, compared to $6.13 billion as of October 29, 2023.

Past And Expected Financial Performance

ASML’s revenue and EBITDA have grown at respective CAGRs of 25.4% and 28.9% over the past three years. Its net income and EPS have increased at CAGRs of 30.2% and 32.9%, respectively. Additionally, the company’s total assets have grown at a CAGR of 13.6% over the same time frame.

Analysts expect ASML’s revenue and EPS for the first quarter (ended March 2024) to decline by 22.2% and 45.3% year-over-year to $5.75 billion and $2.96, respectively. Likewise, the company’s revenue and EPS for the fiscal year 2024 are expected to decline 1.4% and 6.3% from the previous year to $29.57 billion and $20.28, respectively.

Over the past three years, AMAT’s revenue and EBITDA have grown at CAGRs of 13.3% and 15.7%, respectively. Its net income has improved at a CAGR of 22.9% over the same timeframe. Also, the company’s EPS has increased at a CAGR of 26.7% over the same period, while its total assets have grown at a 10.6% CAGR.

For the third quarter ending July 2024, AMAT’s revenue and EPS are expected to grow 2.3% and 3.4% year-over-year to $6.57 billion and $1.96, respectively. Analysts expect the company’s revenue and EPS for the fiscal year (ending October 2024) to increase 1% and 2.4% year-over-year to $26.79 billion and $8.24, respectively.

Profitability

ASML’s trailing-12-month revenue is 1.2 times what AMAT generates. However, AMAT is more profitable, with a trailing-12-month levered FCF margin of 20.34% compared to ASML’s 5.65%. Also, AMAT’s trailing-12-month ROA of 22.36% is higher than ASML’s 20.82%.

In addition, AMAT’s asset turnover ratio of 0.89x compared to ASML’s 0.72x.

Valuation

In terms of forward P/E, ASML is currently trading at 47.92x, 91.5% higher than AMAT, which is trading at 25.03x. ASML’s forward EV/EBITDA multiple of 37.25 is 79% higher than ASML’s 20.99. However, ASML’s forward non-GAAP PEG of 2.24x is lower than AMAT’s 2.40x.

POWR Ratings

ASML has an overall rating of C, which equates to a Neutral in our proprietary POWR Ratings system. Conversely, AMAT has an overall rating of B, translating to a Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. Of the 91 stocks in the Semiconductor & Wireless Chip industry, ASML is ranked #26, while AMAT is ranked #11.

Beyond what we’ve stated above, we have also rated both stocks for Stability, Growth, Momentum, Quality, Sentiment, and Value. Click here to view ASML Ratings. Get all AMAT ratings here.

The Winner

The increasing chip demand across end-use industries, including consumer electronics, telecommunications, and automotive, the growing adoption of advanced technologies such as generative AI and 5G, and government funding are vital factors contributing to the semiconductor sector’s growth.

Thus, semiconductor stocks ASML and AMAT are expected to benefit considerably from the industry’s tailwinds. However, ASML’s relatively higher valuation, poor profitability, and bleak near-term outlook make its rival, AMAT, the better buy now.

Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Semiconductor & Wireless Chip industry here.

What To Do Next?

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AMAT shares were trading at $212.40 per share on Monday morning, up $4.54 (+2.18%). Year-to-date, AMAT has gained 31.28%, versus a 8.30% rise in the benchmark S&P 500 index during the same period.

About the Author: Nidhi Agarwal

Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor’s degree in finance and marketing and is pursuing the CFA program.

Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities. More…

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