By Nicholas Rossolillo, The Motley Fool, Trades Of The Day, 2024-06-05
When it comes to all things accelerated computing and artificial intelligence (AI), Nvidia (NVDA) has rightfully stolen the spotlight. But an entire supply chain ecosystem is hard at work helping Nvidia bring its AI systems to market. And a company called Applied Materials (AMAT) is one of those critical pieces of the supply chain.
Applied is the largest U.S.-based supplier of semiconductor manufacturing equipment — Netherlands-based ASML (ASML) being the biggest manufacturing equipment provider overall, but a specialist in lithography equipment. Applied is a generalist, with a broad and deep portfolio of tech that enables crafting high-end chips of all kinds. And a new wave of growth might be just around the corner.
Last quarter was just OK, so why Applied now?
Applied recently reported its earnings results for its second fiscal of 2024 (the three months that ended in April 2024). Revenue was just shy of $6.7 billion, flat year over year. Earnings per share (EPS) and adjusted EPS, however, were up 11% and 5%, respectively.
Much of the semiconductor industry is either still in a cyclical slump or just emerging from the bear market of the last couple of years. Nvidia's AI and accelerated compute systems have been an obvious exception, since data centers used specifically for AI training are a brand new market.
As a result, Applied's recent revenue performance looks lackluster. It did, however, sidestep a serious downturn that many of its peers suffered since 2022 by pivoting to “mature” chip manufacturing geared toward things like the auto industry and its electric vehicle initiative. Along the way, management has continued repurchasing stock and controlling costs, which is what has led to EPS outperformance even as revenue has flatlined. That's truly impressive, and an indication of business model strength.
But in the second half of 2024, the semiconductor industry is expected to surge higher.
Those new AI chips are of course leading the charge, and more manufacturing capacity will be needed to meet data center construction demand. But all the other end markets that have been down in the dumps (smartphones, PCs, and industrials like autos) are expected to join in on the party as well.
To help meet this surge, lots of chip fabs (facilities that make chips) are under construction right now, and will need to be filled with new equipment. Industry group Semi.org forecasts record sales of advanced equipment starting in 2025 and lasting through 2027. Applied is ready.
Putting deep tech know-how to work
Applied already has a wide and deep equipment portfolio that addresses nearly every step of the electronics manufacturing industry. And the last couple of years, it has been rolling out new equipment that deepens its hooks in this new AI race.
For example, in March 2023, the company officially announced a new machine called Centura Sculpta. It acts as an extension to ASML's lithography equipment used in high-end chipmaking, helping save manufacturers on cost during critical steps in the manufacturing process. Several more advanced chipmaking equipment lines were announced earlier this year addressing other parts of the chipmaking process. Applied is well entrenched in this industry.
The end result of this?
The second half of the year could finally bring rekindled revenue growth for Applied, and even higher resulting EPS growth. Shares aren't as cheap as they were last year, but perhaps rightfully so, if the company delivers on the coming wave of fab spending.
The stock currently trades for 25 times trailing-12-month earnings. I'm happy to continue holding my position, as well as one in ASML and some of Applied's other peers, as the next chip market growth cycle powered by AI nears.
— Nicholas Rossolillo
Source: The Motley Fool
