Applied Materials (AMAT -0.67%) and ASML (ASML -1.64%) are the two largest semiconductor equipment makers in the world. Applied Materials is an American company that provides a wide range of equipment, software, and services used to manufacture semiconductors, display panels, and solar products.

ASML is a Dutch producer of photolithography systems, which are used to etch circuit patterns into silicon wafers. It's also the only producer of EUV (extreme ultraviolet) photolithography systems, which are required to manufacture the world's smallest and densest chips.

An engineer inspects a silicon wafer.

Image source: Getty Images.

Applied Materials and ASML don't compete against each other, but they've both profited from the skyrocketing demand for chips worldwide. But over the past several months, shares of Applied Materials and ASML have both pulled back about 35% from their all-time highs.

Those declines were largely caused by concerns about a slowdown in the broader semiconductor market, but rising interest rates and other macro headwinds are exacerbating that pressure. So should investors take the contrarian view and invest in either linchpin of the semiconductor market today?

Applied Materials faces a near-term slowdown

Applied Materials suffered a slowdown in 2019 as a cyclical downturn in smartphone sales caused the memory chip market to stall out. Soft sales of TVs also throttled the growth of its display-oriented businesses. However, its growth subsequently accelerated over the following two years as new 5G phones and OLED devices hit the market. Stay-at-home trends throughout the pandemic also generated strong tailwinds for the PC, data center, and smart TV markets.

As a result, Applied Materials' revenue and adjusted earnings grew 18% and 37%, respectively, in fiscal 2020 (which ended in October of the calendar year), while its adjusted gross margin expanded from 44% to 45.1%. In fiscal 2021, its revenue and adjusted EPS rose 34% and 64%, respectively, as its adjusted gross margin expanded again to 47.5%.

But in the first nine months of fiscal 2022, Applied Materials' revenue only grew 12% year over year to $19.0 billion. Its adjusted gross margin fell 40 basis points to 46.8%, and its adjusted EPS increased just 16%. For the full year, it expects its revenue and adjusted EPS to rise 11% and 3%, respectively.

It blames that deceleration on supply chain constraints instead of a cyclical slowdown and says its backlog continues to grow as the market's demand for its products outstrips its available supply.

ASML faces the same challenges

ASML also suffered a slowdown in 2019 as it struggled with the same smartphone and memory-related headwinds as Applied Materials. But it quickly overcame those challenges as the world's top foundries -- including TSMC, Samsung, and Intel -- lined up to buy and install new EUV systems to manufacture smaller and denser chips.

As the world's only producer of EUV systems -- which cost about $200 million each and require several planes to ship -- ASML held the golden tickets to winning the "process race" between those top foundries. That monopoly also gave it a lot more pricing power than other equipment makers.

That's why the past two years were so kind to ASML. In 2020, ASML's revenue rose 18%, its gross margin jumped from 44.7% to 48.6%, and its EPS surged 38%. In 2021, its revenue grew 33%, its gross margin rose to 52.7%, and its EPS surged 69%.

But this year, ASML expects its revenue to only rise about 10% and for its gross margin to slip to 49% to 50%. Analysts expect its EPS to dip 3%.

Like Applied Materials, ASML attributes that slowdown to supply chain constraints instead of softer demand. During its latest conference call, CEO Peter Wennink said the market's demand for its systems still "significantly exceeds" its supply. It also didn't alter its long-term target of generating 24 billion to 30 billion euros ($30 billion) in revenue by 2025, which implies its revenue could grow at a compound annual growth rate (CAGR) of up to 13% over the next four years.

Which stock is a better value?

Applied Materials and ASML face many of the same near-term headwinds, but they could both recover quickly as the supply chain constraints ease.

Metric (Period)

Estimated Revenue Growth (FY 2023)

Estimated EPS Growth (FY 2023)

Applied Materials

7%

11%

ASML

20%

33%

Data source: Yahoo Finance, Aug. 19.

ASML's growth could experience a speedier recovery as it resumes its shipments of current-gen EUV systems and launches next-gen EUV for even smaller nodes. However, ASML's forward price-to-earnings ratio of 42 indicates a lot of that growth has already been priced in. Applied Materials only trades at 13 times forward earnings.

Both of these stocks are good long-term investments, but I'd still pick ASML over Applied Materials for three simple reasons: It monopolizes a cornerstone technology of the semiconductor sector, its business model is simpler, and its growth rates are higher.