With a Side of Chips, Please

ASML and TSMC released their Q2 2024 results last week. These relatively unknown companies have developed key technologies that help create semiconductors, making our electronic devices smaller, more powerful, and more energy efficient.  

TSMC, a semiconductor fabrication company, manufactures the actual semiconductors, while ASML builds the lithography machinery used in the fabrication process. Lithography involves using light to etch the circuits on silicon. Some consider ASML’s lithography machinery to be the most complex technology ever created. If scaled out, the machine could shoot a laser to the moon and hit a target the size of a golf ball. 

For the quarter, TSMC reported a revenue of NT$673.5 billion (with $1 equalling NT$32.5), up 32.8% year on year, and an operating income of NT$286.5 billion, up 36.3%. High-performance computing, including revenue from manufacturing Graphics Processing Units (GPUs) used in AI models, accounted for 52% of TSMC’s Q2 revenue, growing 28% quarter on quarter. The second-largest segment for TSMC was revenue from smartphones, which accounted for 33% of the revenue but decreased by 1% quarter on quarter. 

 ASML generated €6.2 billion in revenue for the quarter, down 9.5% year on year, with an operating income of €1.8 billion, down 19%. Net bookings for the quarter were €5.6 billion, up 23.7% year on year. Some of ASML’s latest lithography machines sell for €350 million each, making the purchase not a trivial decision for their fabrication manufacturer clients. This results in ASML having lumpy earnings. ASML views 2024 as a transition year, guiding revenues and earnings to be similar to 2023, and expecting 2025 to be stronger as customers ramp up capacity.  

Despite TSMC’s strong results and ASML’s mixed results, both companies’ share prices decreased during the week. President Biden mentioned considering increased restrictions on selling semiconductors and semiconductor equipment to China, due to their dual-use nature in both civilian and military applications. Presidential candidate Trump also mentioned wanting Taiwan (where TSMC is based) to fund more of its own military operations. 

 ASML is held in the Lunar BCI Worldwide Flexible Fund, and in the offshore portfolios of our clients. ASML maintains an effective monopoly on lithography equipment, with no other companies currently matching their success. Such a monopoly inevitably attracts competition: companies may challenge ASML directly or seek to develop alternative technologies to achieve similar outcomes.