TSM Stock: AI Chip Demand vs. Reality

Generated Title: TSMC or ASML: One Is a Clearer Buy, and the Data Shows Why

The Semiconductor Giants Face Off

Taiwan Semiconductor (TSMC) and ASML are the twin pillars of the semiconductor world. TSMC, as the world's foremost chip foundry, and ASML, with its near-monopoly on lithography systems, especially EUV (extreme ultraviolet) tech, both benefit massively from the ever-growing demand for more powerful and smaller chips. The question, as always, is which one offers the smarter investment right now?

TSMC has been on a tear. From 2020 to 2024, their annual revenue grew at a CAGR of 24%, and EPS (earnings per share) jumped even higher, with a CAGR of 19%. This wasn't just luck. Demand for their 5nm chips was high, the 3nm chips ramped up quickly, and the HPC (high-performance computing) market, fueled by AI, provided a massive tailwind. Nvidia's data center GPUs, which are essential for AI, are a prime example. But is this growth sustainable, or are we looking at a peak?

TSMC's Q3 2025 numbers tell an interesting story. 60% of their revenue came from the 3nm and 5nm nodes. HPC accounted for 57%, smartphones 30%, and other industries the rest. The revenue guidance was revised upward to mid-30% growth. CEO C.C. Wei specifically pointed to the AI megatrend as the reason, crediting Nvidia and other AI chipmakers. Analysts are projecting a 24% revenue CAGR and a 27% EPS CAGR from 2024 to 2027. Trading at 19 times forward earnings, TSMC looks tempting. The stock also offers a microscopic dividend yield of 0.01%.

ASML's numbers are also impressive, but perhaps with a few more caveats. Their revenue and EPS grew at CAGRs of 19% and 23%, respectively, from 2020 to 2024. They benefited from the same tailwinds as TSMC, but they also sell older DUV (deep ultraviolet) systems, which are still needed for legacy chips. ASML's EUV systems cost over $200 million each, while DUV systems go for up to $90 million. That's a hefty price tag, but ASML's dominance gives them significant pricing power. They also lock in customers with maintenance and service fees.

Analysts project an 11% revenue CAGR and an 18% EPS CAGR for ASML from 2024 to 2027. The AI market, stabilizing PC and smartphone sales, and the memory market upswing should boost EUV shipments. But here's where things get tricky.

The China Factor

ASML faces some serious near-term challenges. The tightening export curbs against Chinese chipmakers could hit them hard. They've already been barred from exporting EUV systems to China since 2019, but the ban could be extended to higher-end DUV systems. Sales to mainland China accounted for 36% of their revenue in 2024. If that dries up, it's going to hurt. How much? That's the billion-dollar question no one seems to have a straight answer for.

Furthermore, TSMC and other major customers are pushing their existing "low-NA" EUV systems to the limit before ordering the next-generation "high-NA" EUV systems. These new systems cost over $400 million each. These delays could slow down ASML's sales growth and disrupt their transition to high-NA EUV systems. And with a forward P/E of 34, the stock isn't exactly cheap.

And this is the part of the report that I find genuinely puzzling: Why are TSMC and others delaying the adoption of high-NA EUV? Is it a cost issue? A technical challenge? Or are they simply trying to maximize the ROI on their existing equipment? The sources don't offer much insight here, and it's a crucial piece of the puzzle.

TSMC’s valuation grade is a D+ because its price-to-sales ratio of 10.26 is much higher than the sector median of 3.62. However, its P/E ratio of 24.16 is lower than the sector’s 31.21, suggesting competitive pricing.

TSMC’s growth grade is A-, with year-over-year revenue growth of 39.48%, significantly outpacing the sector’s 6.96%. Its profitability grade is A+, with a net income margin of 42.48%, far exceeding the sector’s 4.44%.

ASML, on the other hand, is regarded by some as one of the best chip stocks to buy. Its stock was recently up 51% year to date, but its valuation has not gotten out of hand, with its forward P/E of 34 just about in line with its five-year average. 5 High-Flying Growth Stocks (Up 23% to 51% in 2025) It's Not Too Late to Buy -- Including Shopify and Taiwan Semiconductor

The Verdict

Both TSMC and ASML are solid long-term investments, no doubt. But if I had to choose one right now, I'd go with TSMC. They're more diversified, face fewer regulatory headwinds (specifically, the China issue), are growing faster, and trade at a lower valuation.

Clear Winner, Clear Reasons

TSMC is the less risky bet. While ASML's technology is critical, its reliance on a few key customers and exposure to geopolitical risks make it a slightly dicier proposition. The data tells the story: TSMC's growth, valuation, and diversification make it the more compelling choice.