ASML vs. Nvidia: The Battle for AI Dominance Heats Up


For the first half of the 20th century, artificial intelligence (AI) remained a subject of intrigue, primarily among science fiction enthusiasts. Characters like sentient machines and androids, frequently depicted in various literary and cinematic masterpieces, embodied the concept of AI at its most imaginative peak. In the second half of the century, scientists and technologists began their diligent pursuit to make AI a reality.

By 2023, the world managed to get an up-close and personal view of the stunning advancements in the field of AI technology. This rapidly evolving innovation is crucial in sculpting the future of humanity across diverse industries. At present, it plays a pivotal role as an impetus behind the emergence of new technologies such as big data, robotics, and the Internet of Things (IoT), to name a few.

Additionally, GenAI, with tools like ChatGPT and AI art generators, is gaining widespread attention. This momentum is anticipated to reaffirm AI's position as a technological trailblazer for the foreseeable future.

AI has its influence across machine learning, large language models, intelligent applications and appliances, digital assistants, synthetic media software, and autonomous vehicles. Corporations that neglect to invest in AI services and products may face the threat of obsolescence. Company executives project an increase in their expenditure for the year 2024 to modernize data infrastructure and adopt AI.

As AI continues its growth, semiconductors and their components have emerged as key topics of debate in the 2023 business landscape. This technological boom has often drawn parallels to the American Gold Rush of the nineteenth century, with the lucrative vantage point proving not to be the gold miners but the shovel manufacturers. Today, it’s NVIDIA Corporation (NVDA) that positions itself as a prominent "shovel seller" by producing chips; these are rare yet vital resources in the realm of AI development.

Based in Veldhoven, Netherlands, ASML Holding N.V. (ASML) is poised to reap substantial benefits from the swift incorporation of GenAI and machine learning technologies. It is projected that AI will initiate significant growth in leading-edge logic wafer capacity through increased volumes of GPU, CPU, and connectivity chips and escalating die sizes.

ASML holds the unique position of being the sole provider of extreme ultraviolet lithography machines, crucial for generating advanced process nodes, including TSMC's 5nm and 3nm parts.

This positions chipmakers – who create the bulk of the chips exploited for powering AI training, machine learning, and inference workloads – as dependent on this European equipment supplier.

Before we delve into a comparative analysis of NVDA and ASML to determine a better long-term buy, let's first individually look at the companies:

NVIDIA Corporation (NVDA)

NVDA, widely acknowledged as the leading U.S. manufacturer of chips and graphics processing units tailored for AI applications, celebrated a banner fiscal year in 2023. The company's stock skyrocketed over the year, tripling in value, propelled by the introduction of innovative products and a surge in reliance on AI technology. Its third-quarter revenue stood at $18.12 billion, with profits surging nearly fourteenfold from the year-ago quarter to $9.24 billion and pushing the company's market cap above $1.5 trillion.

NVDA's reputation for delivering high-quality, AI-ready hardware solutions has earned it a favored status among numerous companies. As a testament to NVDA’s relationship with various multinational corporations, META, a member of the "Magnificent Seven" tech giants, has plans to employ NVDA's GPUs. With the aim of constructing a "massive compute infrastructure" to meet its ambitious AI objectives, META will integrate 350,000 NVDA H100 GPUs and nearly 600,000 H100 compute-equivalent GPUs into its system by 2024.

Investors' exuberance for AI can be traced back to OpenAI's launch of ChatGPT on November 30, 2022. Following this event, NVDA's shares soared by more than 250%, solidifying the company's position as an industry frontrunner in semiconductor manufacturing. This upswing guided the S&P 500 Semiconductor stock price index toward a gain of 108%.

As for what's ahead, NVDA is expanding its production capability for the much-coveted H100 chip.

Further proof of NVDA's dynamism lies in its net income and EBIT margins of 42.10% and 45.94%, which vastly outperform industry averages of 2% and 4.79%, respectively. Likewise, its trailing-12-months ROCE, ROTC, and ROTA of 69.17%, 33.23%, and 34.88% are also significantly higher than the industry averages of 1.48%, 2.82%, and 0.41%, respectively.

As NVDA gears up for its next earnings announcement on February 21, 2024, anticipation is mounting among investors. Revenue and EPS are projected to be $20.21 billion and $4.52, denoting year-over-year increases of 234.1% and 413.2%, respectively.

That said, investors should stay mindful of potential geopolitical tensions. As history indicates, China is crucial to NVDA, contributing to over 90% of the country's $7 billion AI chip market. Should the U.S. impose restrictions on high-end chip exports to China, billions of orders could be placed under threat.

Furthermore, with NVDA trading at a forward non-GAAP price-to-earnings (P/E) ratio of 50.82x, it can be inferred that investors are paying a considerable premium, potentially influencing the valuation of the company’s stock. The forward price/earnings-to-growth (PEG) ratio of 0.37, which may seem attractively balanced at first glance, also suggests that any downward revisions to the EPS could trigger a significant decline in stock value. So far, analysts have revised EPS estimates upward. Nonetheless, it should be noted that this trend could reverse if these estimations fail to materialize.

ASML Holding N.V. (ASML)

ASML develops, produces, markets, sells, and services advanced semiconductor equipment systems. Its key product line is high-end, extremely expensive, and intricate systems for semiconductor manufacturing that employ extreme-ultraviolet (EUV) light to print features at a resolution of 13 nm – outpacing the reach of deep-ultraviolet (DUV) lithography, used in another product line that ASML also offers.

The EUV systems, exclusive to ASML, have been tremendously successful, enhancing the company's profit margins and its stock performance over the past five years. In fact, ASML had emerged as the third most valuable publicly listed firm in European stock markets as of late January.

AI system architecture necessitates the inclusion of chips specifically designed to process substantial quantities of data. High-performance memory chips are crucial to achieving the full potential of AI. The criticality of these chips has prompted chip manufacturers to invest in EUV lithography systems, essential elements of advanced chip manufacturing, made available by ASML. Under normal conditions, the delivery time for ASML's flagship EUV system ranges from 12 to 18 months.

ASML's critical tools are required by Taiwan Semiconductor Manufacturing (TSM), Intel (INTC), and Samsung to produce advanced AI chips for both their clients and their own needs. This dependence on ASML's equipment underscores the company’s pivotal role in the ongoing AI revolution.

In 2023, a lethargic order pace from customers and harsh market circumstances posed challenges for ASML. However, during the same year, the company made a resilient recovery. Its resurgence in orders coincides with the continued competition among top-tier chip manufacturers striving to develop 2-nanometer chips, thus enhancing the computing speed of AI algorithms. The imminent inauguration of several chipmaking facilities is also projected to amplify the demand for ASML machines further.

ASML disclosed solid earnings for the fiscal fourth quarter of 2023. Driven by the demand for the specific equipment necessary for AI chip production, net booking reached €9.19 billion ($9.95 billion), of which €5.6 billion ($5.85 billion) is EUV. Sales escalated to €7.24 billion ($7.84 billion), generating €2.05 billion ($2.22 billion) in profits representing an 8.2% year-over-year increase.

ASML's order lead time of 12 months to 18 months indicates that customers placing an order now can anticipate delivery during the initial half of 2025. It is projected that the order backlog will maintain its swift growth in subsequent quarters, reinforcing management’s narrative of future growth and market stability at the bottom of the cycle.

ASML was highly profitable last year, with shares peaking in the first half of 2023 before briefly declining and then rebounding to approach historic levels unseen since late 2021. This surge can be attributed to ASML's well-received earnings report for the fiscal fourth quarter of 2023. However, the company's current premium valuation and tempered outlook for its 2024 financial performance raise some concerns.

ASML’s non-GAAP P/E ratio of 43.16x suggests a high valuation, indicating the potential for ASML to face some financial pressures. The firm will also need to navigate potential challenges ahead, particularly regarding Chinese chipmakers impacted by export restrictions. Nevertheless, ASML foresees continued robust demand despite potential volatility in this market.

Despite these immediate challenges, ASML remains bullish for the long term about the industry it serves. The company views 2024 as a "transitional" year, predicting that its semiconductor clients are on their way through the bottom of their business cycles and will, therefore, increase demand for its systems significantly in the latter half of 2024 and even more so in 2025. In preparation for this predicted uptick in demand, ASML is actively investing in capacity ramping and technological advancement.

Financial analysis firm Jefferies further supports ASML's optimistic outlook, declaring that ASML is well-positioned to capitalize on an anticipated surge in AI demand. Based on this projection, it forecasts ASML’s revenue to grow at a 21% CAGR between 2022 and 2025.

The Winner

Peter Lynch once said, "Everybody is a long-term investor until the market goes down." During a market crash, plenty of investors retreat hastily, potentially missing out on substantial long-term gains. Therefore, a more prudent strategy would be to stay the course throughout downturns or even increase share purchases via dollar-cost averaging.

Nonetheless, this tactic is only applicable to robust, sustainable companies. Two firms fitting these parameters are NVDA and ASML – both undoubtedly presenting compelling long-term retirement investment opportunities.

However, there are certain factors one should consider. NVDA’s trailing-12-month gross profit margin of 69.85% is higher than ASML’s 51.29%. In addition, NVDA’s trailing-12-month cash from operations of $18.84 billion is higher than ASML’s $6.01 billion. Thus, NVDA seems more profitable.

Turning to growth, NVDA has exhibited an impressive revenue increase at a 44.8% CAGR over the past three years, while ASML trails with a still respectable growth at a 25.4% CAGR. During the same period, NVDA’s net income grew at a 70.3% CAGR compared to ASML’s 30.2% CAGR.

However, NVDA carries a heavy price tag reflected by its forward EV/EBITDA multiple of 47.34, higher than ASML’s 33.05. Similarly, NVDA’s high forward EV/Sales of 26.22x, compared to ASML’s 11.31x, further emphasizes the costliness of NVDA stocks.

NVDA possesses an astounding 90% stake in the AI chip market, which, when coupled with its astounding profitability and growth, underscores its industry dominance despite its lofty valuation.

The unprecedented demand surge for ASML machines, prompted by the burgeoning need for AI infrastructure, signifies the pivotal role the company plays in revolutionizing AI technologies. Notably, specialized AI chips, such as those fabricated by NVDA using ASML’s architecture, perpetually dominate the field, stressing the substantial weight ASML carries within the AI sphere.

However, growing production capacity due to ASML's record orders could produce potential price dips, impacting the industry negatively. The massive investment influx in semiconductor production may reduce pricing power and, contract margins and profits.

Turning a keen eye on dividends, NVDA pays an annual dividend of $0.16 per share, equating to a yield of 0.03%. Meanwhile, ASML offers a substantial dividend of $6.12 per share, yielding 0.70%. Also, ASML’s dividend grew at CAGRs of 34.9% and 30.7% over the past three and five years. Hence, investors aiming for dependable, long-term returns could consider allocating their resources toward incorporating ASML into their portfolios.

Undeniably, NVDA’s robust expansion is praiseworthy, with management consistently portraying an optimistic outlook for the company's future. However, the firm is not without risk. With NVDA's shares currently trading at 26.2x sales and 50.8x earnings, these valuations indicate that any slight mishap has the potential to jolt the company's market standing significantly. Given the prevailing market irregularities, potential hazards, and sluggish price momentum, exercising caution and waiting for a better entry point on the stock may be a sensible strategy.