The semiconductor industry is a great sector to invest in because numerous secular trends are driving demand. Those trends include the growing markets of artificial intelligence, electric vehicles (EVs), and renewable energy such as solar. All of these sectors rely on semiconductor products.
Among the semiconductor companies to invest in, two have seen share price declines over the past year, creating buy opportunities. They are Wolfspeed (WOLF -13.90%) and ASML (ASML -0.67%).
The former's stock is down more than 80% over the past year through the week ending January 10. Meanwhile, ASML fell from a 52-week high of $1,110.09 last July to a low of $645.45 in November, and shares remain well off its high at the time of this writing.
Between these two semiconductor giants, is one a better choice to invest in for the long haul? Yes, and to unpack which, let's look at both in more detail.
Wolfspeed's pros and cons
Wolfspeed specializes in silicon carbide (SiC). The company's SiC products enable smaller, more efficient power components, such as for use in EVs.
Due to the secular trends mentioned above, Wolfspeed management believes SiC demand eventually can increase annual sales from the $807 million generated in its 2024 fiscal year, ended June 30, to $3 billion. While that kind of growth sounds appealing, the reality today is that the company's revenue is in decline.
Sales in its fiscal first quarter, ended September 29, were $194.7 million, down from $197.4 million in the prior year. The company expects that decline to extend into its fiscal Q2 with revenue in the range of $160 million to $200 million compared to the previous year's $208.4 million.
Wolfspeed operates in a cyclical industry, which is experiencing softness in the industrial and energy sectors. This caused sales to decrease, hurting the firm's profitability.
In the span of one quarter, its gross profit went from $2.4 million in fiscal Q4 to a loss of $36.2 million in Q1 as its cost of revenue increased more than 30% year over year. Wolfspeed is responding by cutting costs. It is striving to achieve $200 million in annual cash savings.
The company also faces other challenges. Its CEO resigned in November, and its balance sheet is saddled with over $3 billion in long-term debt. It exited Q1 with total assets of $7.9 billion versus total liabilities of $7.2 billion.
Despite the challenges, bright spots exist. The company is looking to improve its balance sheet with the help of tax credits. Moreover, Wolfspeed's EV business grew by 2.5 times year over year in Q1, and the company expects EV revenue's continued growth throughout 2025.
A look at ASML
ASML makes lithography equipment employed in the construction of semiconductor chips. It is the sole supplier of extreme ultraviolet (EUV) lithography, granting the firm a monopoly on the tech. EUV lithography is used to produce the most advanced chips, such as those utilized in AI.
Given its market strength in EUV lithography, why did ASML's stock fall? Like Wolfspeed, ASML is experiencing a cyclical downturn. Macroeconomic conditions are expected to cause its full-year 2024 revenue to come in around 28 billion euros, a slight increase over the prior year's 27.6 billion euros.
Moreover, geopolitical tensions resulted in government restrictions on semiconductor-related sales to China. In its fiscal Q3, ended September 29, ASML's sales to China represented nearly half its income in the quarter. The firm expects that percentage to drop to around 20% in 2025.
But these are short-term headwinds. The drop in China sales seems dramatic, yet it represents the historical norm for the company. In addition, ASML is on strong financial footing. It notched 3.8 billion euros in gross profit in Q3, an improvement from 3.5 billion euros in the prior year.
ASML's balance sheet is solid as well. The firm exited fiscal Q3 with total assets of 41.8 billion euros compared to total liabilities of 25.6 billion euros.
Making a decision between Wolfspeed and ASML
Both Wolfspeed and ASML face headwinds at this time, but over the long run, which can see its business rebound, making it the better semiconductor investment? I believe the answer is ASML.
Wolfspeed operates in a highly competitive market, while ASML's only competition is among manufacturers providing older lithography tech, not EUV. In addition, ASML is on strong financial footing, as illustrated by its balance sheet and gross profit growth.
Another factor to consider is stock valuation. Looking at each's price-to-sales (P/S) ratio, which indicates how much investors are willing to pay for every dollar of a company's sales, both have seen a drop in recent months.
Data by YCharts.
Wolfspeed's P/S ratio is lower between the two companies, suggesting it's a better value. However, ASML deserves a higher valuation because of its stronger financials, and it holds a monopoly in EUV lithography equipment.
In addition, looking at earnings-per-share (EPS) shows ASML has steadily grown its EPS over time, while Wolfspeed has gone in the opposite direction.
Data by YCharts.
Taking these factors into consideration, ASML is the better semiconductor stock to invest in for the long term.
