Applied Materials, Inc. (AMAT) and ASML Holding N.V. (ASML) are two prominent players in the semiconductor industry. AMAT provides material engineering solutions for semiconductor chips to electronic manufacturers of flat panel displays, solar photovoltaic cells, and modules. The company also supplies equipment to produce coatings for flexible electronics, packaging, and other applications. ASML develops, sells, and services advanced semiconductor equipment systems, focusing on lithography-related systems worldwide. It caters mainly to the makers of memory chips and logic chips.
Despite growing supply chain constraints worldwide, strong demand for semiconductor chips from consumer electronics, electric vehicles, and several other industries has allowed the semiconductor industry to witness a 32.4% year-over-year sales growth in February 2022. With considerable corporate investments and government support to ramp up production, the shortage is expected to ease next year.
The global semiconductor market is expected to grow at a 6.6% CAGR to reach $808.50 billion by 2030. So, both AMAT and ASML should benefit.
ASML is a winner with 6.6% gains over the past month versus AMAT’s 3.4% loss. But which of these stocks is a better pick now? Let’s find out.
Latest Developments
On December 23, 2021, AMAT and the Institute of Microelectronics (IME), a research institute of Singapore’s Agency for Science, Technology, and Research (A*STAR), announced a new phase of their research collaboration at the Center of Excellence in Advanced Packaging in Singapore. As chipmakers and systems companies demand heterogeneous design and advanced packaging solutions, the offering of heterogeneous chip integration with hybrid bonding technology and other emerging technologies will help meet the demand for reduced wiring distances, increased I/O density, improved power efficiency, and greater efficiency system performance.
As part of their long-term High-NA collaboration framework, on January 19, 2022, Intel Corporation (INTC) issued its first purchase order to ASML for the delivery of the industry’s first TWINSCAN EXE:5200 system – an extreme ultraviolet (EUV) high-volume production system with a 0.55 numerical aperture and higher productivity to enable higher-resolution patterning for even smaller transistor features. INTC’s and ASML’s commitment to design EUV 0.55 NA will enable multiple future nodes beginning in 2025 as the industry’s first deployment, followed by memory technologies at a similar density. This system should witness widespread recognition across the industry in the coming months.
Recent Financial Results
AMAT’s net sales for the fiscal 2022 second quarter ended January 30, 2022, increased 21.5% year-over-year to $6.27 billion. The company’s non-GAAP gross profit came in at $2.97 billion, indicating a 25.2% year-over-year improvement. Its non-GAAP operating income came in at $1.99 billion, up 32.7% from the prior-year period. While its non-GAAP net income increased 32.3% year-over-year to $1.70 billion, its non-GAAP EPS grew 36% to $1.89. As of January 30, 2022, the company had $5.26 billion in cash and cash equivalents.
For its fiscal 2021 fourth quarter ended December 31, 2021, ASML’s total net sales increased 17.2% to $4.99 billion yearly. The company’s non-GAAP operating income came in at $2.70 billion, indicating a 22.1% rise from the prior-year period. Its income from operations came in at $2.03 billion, representing a 35.1% year-over-year improvement. ASML’s net income came in at $1.77 billion, up 31.3% from the prior-year period. Its EPS rose 35.6% year-over-year to $3.23. The company had $6.95 billion in cash and cash items as of December 31, 2021.
Past and Expected Financial Performance
Over the past three years, AMAT’s total assets, levered free cash flow, and tangible book value have increased at CAGRs of 10.4%, 62.4%, and 21.5%, respectively.
AMAT’s EPS is expected to grow 18.9% year-over-year in fiscal 2022, ending October 31, 2022, and 14.6% in fiscal 2022. Its revenue is expected to grow 15.1% in fiscal 2022 and 10.2% in fiscal 2023. Analysts expect the company’s EPS to grow at a 16.5% rate per annum over the next five years.
ASML’s total assets and levered free cash flow have increased at CAGRs of 14.5% and 69.2%, respectively, over the past three years. Its tangible book value has declined at a CAGR of 8.2% over the past three years.
Analysts expect ASML’s EPS to improve 12.3% year-over-year in fiscal 2022, ending December 31, 2022, and 15.1% in fiscal 2023. Its revenue is expected to grow 13.8% year-over-year in fiscal 2022 and 11.2% in fiscal 2023. Analysts expect the company’s EPS to grow at a 29.8% rate per annum over the next five years.
Valuation
In terms of non-GAAP forward PEG, ASML is currently trading at 1.62x, 55.8% higher than AMAT’s 1.04x. In terms of forward EV/Sales, AMAT’s 3.99x compares with ASML’s 10.16x.
Profitability
AMAT’s trailing-12-month revenue is almost 1.1 times ASML’s. AMAT is also more profitable, with a 56.1% ROE versus ASML’s 49%.
Furthermore, AMAT’s ROA and ROTC of 19.9% and 27.9% compare with ASML’s 14.2% and 24.3%, respectively.
POWR Ratings
While AMAT has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, ASML has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
Both AMAT and ASML have a C grade for Momentum, consistent with their mixed price performance. AMAT has lost 5% over the past six months, while ASML fell 16.3%.
AMAT has a C grade for Value, reflecting its slightly higher-than-industry valuation ratios. AMAT’s 3.99x forward Price/Sales is 22.9% higher than the 3.25x industry average. ASML’s D grade for Value is in sync with its overvaluations. ASML has a 10.29x forward Price/Sales, 216.8% higher than the industry average of 3.25x.
Of the 96 stocks in the A-rated Semiconductor & Wireless Chip industry, AMAT is ranked #31, while ASML is ranked #68.
Beyond what we have stated above, our POWR Ratings system has also rated AMAT and ASML for Stability, Quality, Sentiment, and Growth. Get all AMAT ratings here. Also, click here to see the additional POWR Ratings for ASML.
The Winner
Although intensifying supply chain disruptions and the expectation of aggressive interest rate hikes are causing immense pressure on the tech industry, strong demand and increasing investment in the chip industry should benefit AMAT and ASML. However, a relatively lower valuation and higher profitability make AMAT a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Semiconductor & Wireless Chip industry.
AMAT shares rose $0.16 (+0.14%) in after-hours trading Monday. Year-to-date, AMAT has declined -26.00%, versus a -7.09% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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