Foundry giant Taiwan Semiconductor Manufacturing (NYSE: TSM), popularly known as TSMC, released its fourth-quarter 2024 results on Jan. 16, and investors reacted positively to the company’s performance as it not only beat Wall Street’s expectations but also delivered better-than-expected guidance.
TSMC stock jumped nearly 4% following its earnings report. More importantly, its solid showing rubbed off positively on its peers in the semiconductor industry as well. That wasn’t surprising as the Taiwan-based company’s impressive year-over-year increase of 37% in fourth-quarter revenue to $26.9 billion and the first-quarter 2025 guidance that would translate into a 35% jump from the year-ago period indicate that semiconductor sales are set to remain solid in 2025.
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TSMC has a market share of 64%. Most of the major chipmakers and consumer electronics companies use the company’s fabrication plants to manufacture their chips. So it’s a bellwether in the semiconductor industry, which is why it is not surprising to see its results lifting other names in the sector.
More importantly, TSMC has guided for capital expenditures (capex) of $38 billion to $42 billion in 2025, suggesting that it remains upbeat about the long-term prospects of the industry. That would be a major increase of 34% when compared to the company’s 2024 capex of $29.8 billion.
The company’s capex in 2023 stood at $30.45 billion, which means that its outlay decreased last year.
The significant improvement in TSMC’s outlay this year bodes well for Dutch semiconductor equipment giant ASML Holding (NASDAQ: ASML). Let’s look at why.
ASML stock has struggled for momentum on the market in the past year, delivering gains of just 2% as compared to the 26% gains clocked by the PHLX Semiconductor Sector index during the same period. A key reason behind ASML’s weak performance has been the tepid spending on semiconductor manufacturing equipment.
The Dutch company is known for selling lithography machines that allow chipmakers and foundries to etch patterns on silicon wafers that are then used for manufacturing chips. ASML’s 2024 revenue guidance of 28 billion euros ($29 billion) points toward a slight increase in its top line from 2023 levels of 27.6 billion euros ($28.6 billion). Management attributes this tepid growth to the longer-than-expected recovery in certain segments of the semiconductor market.
ASML’s 2025 revenue guidance of 30 billion euros to 35 billion euros ($31 billion to $36.2 billion) was also disappointing as it was at the lower end of the company’s original guidance range of 30 billion euros to 40 billion euros ($31 billion to $41.4 billion). The company pointed out on its October 2024 earnings conference call that the recovery in semiconductor equipment spending is “more gradual than what we anticipated before, and it will continue in 2025.” As a result, its customers are exercising cautiousness.
However, TSMC’s latest results indicate otherwise as the company is setting itself up to capitalize on the chip opportunities created by the growing demand for artificial intelligence (AI), high-performance computing (HPC), and 5G smartphones. TSMC management points out that “a higher level of capital expenditures is always correlated with higher growth opportunities in the following years.”
The substantial jump in TSMC’s spending is great news for ASML investors. According to Morningstar, TSMC has accounted for 33% of ASML’s revenue on average over the past five years. As a result, TSMC’s higher outlay should directly benefit ASML, especially considering that the former is going to direct most of its capital spending on advanced chip nodes.
More specifically, TSMC is going to spend 70% of its 2025 capex on advanced process nodes, which refers to chips manufactured using 7-nanometer (nm), 5nm, and 3nm processes. ASML is the only supplier of EUV (extreme ultraviolet) lithography systems that allow the likes of TSMC to manufacture such advanced chips, which are now being used for powering AI data centers, smartphones, and PCs (personal computers).
TSMC says that its revenue from sales of AI accelerators tripled last year. It expects AI chip revenue to double in 2025. More importantly, TSMC is forecasting a 40% annual increase in sales of its AI accelerators over the next five years. All this explains why TSMC is ramping up its capex in 2025 in a bid to meet the robust demand from its customers.
ASML is set to release its fourth-quarter 2024 results on Jan. 29. The company expects 9 billion euros ($9.3 billion) in revenue for the current quarter at the midpoint, which would be a nice improvement of 25% from the same period last year. The midpoint of ASML’s 2025 revenue guidance stands at 32.5 billion euros ($33.6 billion), which points toward a 16% increase from 2024’s estimated revenue.
However, don’t be surprised to see ASML carrying forward the strong momentum that it is set to attain in the 2024 fourth quarter into the new year as well and deliver better-than-expected results. After all, the healthy hike in capex by ASML’s major customer could allow the Dutch giant to fulfill more orders, and it may even upgrade its outlook for 2025.
ASML already had an order backlog of 36 billion euros ($37.3 billion) at the end of the third quarter of 2024. TSMC’s incremental spending could lead to a strong jump in ASML’s order inflow this year. And ASML may fulfill more orders as other chipmakers and foundries would not want to lose ground to TSMC and could place orders for advanced EUV lithography machines.
So, the stage seems set for ASML to deliver better-than-expected results and guidance when it releases its results next week. That’s why savvy investors can consider buying this AI stock that is trading at an attractive 30 times forward earnings, which is lower than the tech-laden Nasdaq-100 index’s earnings multiple of 32.5.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
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