Categories Analysis, Technology

Applied Materials stock offers good returns amid semiconductor boom

The company plans to generate about 70% of services and parts revenue through subscription-like long-term agreements in the future

The semiconductor market continues to face severe shortage though chipmakers and equipment manufacturers are expanding production capacity to meet the demand growth, triggered by the digitization spree during the pandemic. The aggressive capacity addition by chipmakers is bringing a wave of opportunities for semiconductor equipment manufacturers like Applied Materials, Inc. (NASDAQ: AMAT).

In the past twelve months, The Silicon Valley-headquartered tech firm witnessed a three-fold increase in market value, and the stock surged to a record high this month. It is widely expected that the momentum would continue in the coming weeks, leading up to the next earnings release scheduled for May 20. Experts’ consensus price target for the next twelve months represents a 10% upside. Those looking to tap the unique buying opportunity cannot ignore the stock, which carries a strong buy rating.

Demand Spikes

The growing demand for semiconductor products can be linked to the widespread adoption of digital services after the pandemic brought about a change in the way businesses operate. Currently, chipmakers are struggling to meet the orders, which reflects the cloud migration spree and digital transformation across industries.


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The company is banking on its broad portfolio of products and their growing adoption to expand market share this year and beyond. A key growth driver would be the continuing uptrend in foundry/logic investment, to be complemented by the expansion of OLED beyond smartphones to TV and acceleration in DRAM and NAND spending. Taiwan Semiconductor Manufacturing Company (TSM), Applied Materials’ largest client, is planning investments worth $100 billion for capacity expansion, while Intel (INTC) is on track to build two new fabrication facilities in Arizona.

Cloud service providers are forecasting data center Capex growth of more than 15% this year on top of record spending in 2020. With the broader adoption of 5G handsets, silicon content in smartphones is growing at double-digit rates. And in automotive, where there are known supply shortfalls, total semi-consumption is expected to expand more than 15% this year, translating these factors to industry investments. In foundry/logic, leading-edge investments are very strong and have been well articulated by our customers.

Gary Dickerson, CEO of Applied Materials

Strong Start to 2021

Earnings and revenues increased and topped expectations in the first quarter of 2021, bringing cheer to investors. The top-line moved up 24% from last year to a record high of $5.16 billion in the January quarter. That translated into a 27% increase in adjusted earnings to 42 cents. The foundry and logic segment accounted for about 58% of total revenues.


Read management/analysts’ comments on quarterly reports


Interestingly, the company’s services business grew at a compound annual rate of 12% in the past five years, surpassing the growth registered by its installed base. During an interaction with investors this week, Applied Materials’ executives unveiled a plan to generate about 70% of the services and parts revenue through subscription-like long-term agreements. They see revenues rising about 55% and adjusted earnings per share by100% in the next three years, from the 2020 levels.

At the Bourses

At $143.05, the stock closed the last trading session down 1% but traded slightly higher in the early hours of Wednesday’s session. The shares have gained about 23% since last month.

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