Applied Materials, Inc. (AMAT) and ASML Holding N.V. (ASML) are two leading semiconductor equipment producers that operate internationally. AMAT operates through Semiconductor Systems, Applied Global Services, and Display and Adjacent Markets segments. ASML offers computational lithography and software solutions, inspection related systems for memory and logic chipmakers, and other associated services.

The mainstream adoption of Internet of Things (IoT) and the rapid deployment of 5G technology for improved internet experiences, as well as the increasing semiconductor needs by the automotive sector, have turbo charged the growth of the semiconductor market. In fact, working-from-home arrangements and a growing dependency on cloud services amid the COVID-19 pandemic are likely to have an enduring impact on consumer electronics, which in turn will boost the demand for semiconductors. Because a global microchip shortage is expected to continue through 2021, we think semiconductor manufacturers AMAT and ASML are in a great position to witness substantial demand across their entire product portfolios and deliver robust returns.

While AMAT returned 129.6% over the past year, ASML gained 129.9%. In terms of past six-month performance, AMAT is the clear winner with 127.7% gains versus ASML’s 66.7%. But which of these stocks is a better pick now? Let’s find out.

Click here to checkout our Semiconductor Industry Report for 2021

Latest Movements

This month, AMAT introduced its AI(x) platform to allow engineers to see into semiconductor processes in real-time, solve increasingly complex problems and accelerate the development and commercial deployment of new chip technologies. The platform should provide customers better outcomes and be a real value addition to the semiconductor industry.

Last month, the company unveiled a new playbook for process control that uses Big Data and artificial intelligence (AI) technology. The launch should enable semiconductor manufacturers to accelerate node development and sustain higher yields.

And last year, ASML shipped its first ArF dry system on the NXT platform. The company also shipped the first YieldStar 385 to a customer in the fourth quarter, and three eScan1000 Multibeam systems in 2020, to provide its users with early process integration capability.

Recent Financial Results

In the first quarter, ended January 31, 2021, AMAT’s net sales increased 24% year-over-year to $5.16 billion. It reported a gross margin of 45.5%, compared to 44.6% in the first quarter of 2020. Furthermore, AMAT’s net income rose 27% from its  year-ago value to $1.13 billion, while its EPS increased 27.1% year-over-year to $1.22. Its gross profit rose 26.4% year-over-year to $2.35 billion.

ASML’s total net sales increased 5.4% year-over-year to €4.25 billion in the fourth quarter ended December 31, 2020. The company’s net income was €1.35 billion, while its earnings per share was €3.23 over this period. Its gross profit was €2.21 billion, representing an increase of 14% year-over-year.

Past and Expected Financial Performance

AMAT’s revenue and tangible book value have grown at CAGRs of 5.6% and 18%, respectively, over the past three years. In comparison, the CAGRs of ASML’s revenue and tangible book value have been 16% and 17.3%, respectively, over this period.

The Street expects AMAT’s revenue to increase 26.3% in the current year and 7.8% next year. The company’s EPS is estimated to rise 69.7% in the current quarter, and at the rate of 21.3% over the next five years.

ASML’s revenue is expected to increase 32.1% in 2021 and 11.4% in 2022. A consensus EPS estimate of $3.02 for the current quarter represents a 1.3% improvement from the same period last year. Also, over the next five years, ASML’s EPS is expected to grow at the rate of 17.1%.

Profitability      

AMAT’s trailing-12-month revenue is 1.2 times ASML’s. But ASML is slightly more profitable, with a gross profit margin of 48.6% versus AMAT’s 45.2%.

However, AMAT’s ROE and ROA of 38.3% and 14.1%, respectively, compare favorably with ASML’s 26.9% and 10.2%.

Valuation

In terms of trailing-12-month Price/Sales, ASML is currently trading at 15.26x, 118% higher than AMAT, which is currently trading at 7.00x. Also, its trailing-12-month EV/Sales of 14.94x is 114% higher than AMAT’s 6.98x. ASML is also more expensive in terms of forward EV/EBITDA (38.82x vs 18.64x).

POWR Ratings

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

In terms of Value Grade, AMAT has a C. ASML’s Value Grade of F is reflective of its higher-than-industry average P/E ratio.

Also, in terms of Quality Grade, both AMAT and ASML have a B, given their higher-than-industry ROE and ROA. Both AMAT and ASML have a B Sentiment Grade, which is in sync with  analysts’ expectations about their earnings and revenue growth.

Of the 99 stocks in the B-rated Semiconductor & Wireless Chip industry, AMAT is ranked #28 while ASML is ranked #49.

Beyond what I’ve stated above, our POWR Ratings system also rates AMAT and ASML for Growth, Stability, and Momentum. Get the ratings for AMAT here. Also, click here to see the additional POWR Ratings for ASML.

The Winner

Both AMAT and ASML are good long-term investments considering the rising demand in the semiconductor industry and their continued technological innovation. However, AMAT appears to be a better buy based on the factors discussed here. Its higher profitability and relative undervaluation should help it perform better in the near term.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. If you’re looking for other top-rated stocks in the Semiconductor & Wireless Chip industry, click here.

Click here to checkout our Semiconductor Industry Report for 2021

ASML shares were trading at $635.57 per share on Thursday afternoon, up $9.01 (+1.44%). Year-to-date, ASML has gained 30.31%, versus a 9.56% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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