ASML is the closest thing to a genuine monopoly in modern industry — nobody else makes the machines that print the most advanced chips. TSMC is its largest customer and the company that actually prints them. ASML earns the better return on capital. TSMC scores 93 to ASML's 75. Working out why is a good lesson in what a score can and cannot see.
ASML wins the quality test
On the single measure that best identifies a great business, ASML is ahead. Its return on capital employed is 38.0% over the trailing year against TSMC's 29.4%, and its cash-flow return on capital is 35.7% against TSMC's 16.6% — the tighter gap between accounting and cash returns tells you ASML converts profit to cash far more cleanly.
That is what a monopoly looks like in the numbers. ASML sets its prices, its customers have nowhere else to go, and it does not need much incremental capital to serve them.
TSMC wins everything else
- Revenue growth — TSMC 30.8%, ASML 11.4%
- Operating income growth — TSMC 50.5%, ASML 14.8%
- Net margin — TSMC 42.5%, ASML 28.3%
- Free cash flow growth — TSMC +27.5%, ASML −10.5%
TSMC is growing revenue nearly three times faster, converting it at a margin fourteen points higher, and — unlike almost every other company in this cycle — its free cash flow is rising rather than falling. That last line is doing a lot of work in the 93.
The price of the monopoly
ASML trades at roughly 1.8 times TSMC's trailing earnings multiple. On next year's consensus the gap does not close — it widens, because ASML's forward multiple is barely below its trailing one while TSMC's falls sharply on expected earnings growth of 22.9%.
So the market is charging close to double for the business growing three times slower. That is not irrational — a monopoly deserves a premium, and ASML's returns justify part of it. But it is a large premium to pay for a company whose free cash flow is currently shrinking.
The risk the numbers don't show
We should be honest about what a financial score cannot capture here. TSMC's manufacturing is concentrated in Taiwan, and no ratio on its report card prices geopolitical risk. A 93 is a statement about growth, returns, margins, and balance sheet — it is not a statement that the shares are safe.
ASML carries a narrower version of the same problem: its revenue depends on a handful of customers making enormous capital commitments, and export controls determine who it is allowed to sell to. Neither risk appears in any line above.
The bottom line
ASML is the better business by the strictest quality measure and the more expensive stock by a wide margin. TSMC is growing three times faster, earning a higher margin, generating more cash than last year, and trading at little more than half the multiple.
The eighteen-point score gap is not a claim that ASML is a poor company. It is the report card noticing that you pay nearly twice as much for slower growth and falling cash flow — and that on the numbers alone, the customer currently looks like the better investment than the monopolist. If the ROCE comparison is the part that interests you, here is what that measure actually captures.