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 -1.83%) and ASML (ASML 1.22%).
Wolfspeed's stock is down more than 80% over the past year. Meanwhile, ASML fell more than 40% from a 52-week high of $1,110 last July to a low of $645 in November, and shares remain well off their high.
Between these two semiconductor giants, is one a better choice to invest in for the long haul? Yes, and to unpack which one, let's look at both in more detail.
Wolfspeed's pros and cons
Wolfspeed specializes in silicon carbide (SiC). These 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 2025 fiscal first quarter, ended this past Sept. 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 company's profitability.
In the span of one quarter, its gross profit went from $2.4 million in 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, in Q1, Wolfspeed's EV business grew year over year by more than twofold, and the company expects EV revenue to continue growing 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 company 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 Sept. 29, ASML's sales to China represented nearly half its income in the quarter. The company 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 company 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 is likely to 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 technology, 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 stock'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 its 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.
