Two Semiconductor Stocks to Watch in 2025

With Microsoft announcing plans to invest $80 billion in data centers worldwide this year, there is no indication that spending on artificial intelligence (AI) infrastructure will slow down. As companies continue to develop their AI models, the demand for chips to train these models is rapidly increasing. Both Nvidia and Broadcom have highlighted the expectation that customers will deploy AI chip clusters containing over 1 million chips soon, a significant increase from the previous training models.

This brings us to two semiconductor stocks that could benefit greatly from the ongoing demand for AI chips.

Taiwan Semiconductor Manufacturing Company (TSMC)

Many chipmakers like Nvidia and Broadcom focus on designing chips while outsourcing their manufacturing to third parties. However, manufacturing semiconductors is complex and requires substantial technological expertise. It often involves a relentless effort to decrease chip sizes to improve processing power and energy efficiency. Additionally, constructing foundries, or chip manufacturing facilities, requires a heavy financial investment and must operate nearly at full capacity to be profitable.

The challenges of running a third-party foundry are exemplified by Intel, which has invested heavily in its foundries only to find this segment losing money. Samsung's foundry division recently reported significant losses, leading to plans to cut 30% of its workforce and close half of its production lines.

In contrast, Taiwan Semiconductor Manufacturing Company (often referred to as TSMC) stands out as the leading player in this market. The company has experienced a substantial boost in revenue and profits, largely driven by the AI chip boom. Last quarter, TSMC's revenue rose 36% to $23.5 billion, and its earnings per American Depositary Receipt (ADR) jumped 50% from $1.29 to $1.94 compared to the previous year.

TSMC is favored as the primary contract manufacturer for advanced chips due to its scale and technological advantages. Unlike many competitors that are struggling, TSMC has notable pricing power, enabling it to increase its gross margin to 57.8% from 54.3% a year earlier. Reports suggest that TSMC has also planned to raise its prices in 2025. Alongside this, the company is focused on expanding its manufacturing capacity by building new foundries.

Given its position in the market, TSMC looks well-positioned to benefit from the continued demand for chips, and its stock is currently considered fairly priced. It trades at a forward price-to-earnings (P/E) ratio of 19.5 and a price/earnings-to-growth (PEG) ratio of 0.65, which is often seen as undervalued because a PEG ratio below 1 indicates that growth stocks are priced attractively.

ASML Holdings

While TSMC focuses on chip manufacturing, ASML Holdings is the leader in producing the equipment that foundries like TSMC rely on to manufacture semiconductors. ASML specializes in extreme ultraviolet (EUV) lithography, a cutting-edge technology for creating advanced chips, with machines retailing for more than $200 million each.

Recently, ASML introduced its next-generation high-NA EUV technology, with these new machines costing around $380 million each. Intel has become the first company to invest in these advanced machines, while TSMC received one for trial use late in 2024. However, widespread adoption may still take years. TSMC has indicated it currently does not need high-NA EUV technology for producing today's high-end chips.

ASML executives are expected to meet with TSMC soon to discuss future production plans. Although TSMC may not require high-NA EUV machines for mass production until at least 2030, they will still need more EUV systems to facilitate increased production and new foundry establishments next year. ASML essentially holds a monopoly in the EUV market and stands to benefit in the long run, even if the newest technology takes time to realize its full potential.

Additionally, Intel plans to utilize high-NA EUV technology in production by 2027, raising questions about whether TSMC will allow Intel a significant lead in adopting this technology, despite its current struggles. Intel's investment of $100 billion to enhance its chip manufacturing capacity in the U.S., supported by nearly $8 billion in government funding and a 25% tax credit, shows its commitment to this field.

Interestingly, Intel was late to embrace EUV technology seeking to maximize profits, while TSMC strategically adopted it, helping to cement the current positions of both companies. Thus, it is plausible that TSMC may consider integrating this technology sooner than 2030 to avoid reversing their market standing.

ASML is navigating a transition with new technologies while managing increased orders for older equipment from Chinese companies amid fears of stricter export regulations on semiconductor technology. Yet, as the sole producer of EUV and high-NA EUV machines, ASML is expected to be a strong player in the market, trading at 24 times forward earnings, indicating a reasonable price for investors.

AI, Semiconductors, Investing