Applied Materials (AMAT, Financial) has delivered a string of good results demonstrating rapid growth in revenues as well as earnings, making the most of the global chips shortage.
The company's broad portfolio and exposure to technology inflections, combined with the traction of new products, make the company well-positioned in this ecosystem. The rising need for specialty nodes in automotive, power, 5G, Internet of Things (IoT), communications and image sensor markets is expected to be a future growth driver.
The semiconductor demand has been greatly outpacing supply recently, creating a tailwind for the company as it supplies semiconductor fabrication equipment to Taiwan Semiconductor (TSM, Financial), one of the largest semiconductor manufacturers in the world. Applied Materials is also attempting to bolster its artificial intelligence and machine learning capabilities in the wafer fabrication domain, which is evident from the recent launch of AIx. Thus, even after the recent runup, is it possible that the stock still has steam left?
Recent financial performance
Applied Materials' recent price runup has been spurred by three back-to-back all-around beats.
For its most recent result for the first quarter of the 2021 fiscal year, the company reported a top-line of $5.16 billion, which was a staggering 24.03% growth as compared to the $4.16 billion of revenue reported in the corresponding quarter of the previous fiscal year. Applied Materials cruised past the average Wall Street expectation of $4.98 billion.
Revenues translated into a gross margin of 45.74% and an operating margin of 28.03%, which was higher than that in the same quarter of 2020.
Applied Materials reported net income of $1.13 billion and adjusted earnings per share (EPS) of $1.39, which again outperformed the analyst consensus estimate of $1.28.
The company generated as much as $1.42 billion in the form of operating cash flows for the quarter and spent hardly $216 million in investing activities, leaving the management with a huge free cash flow.
Strong semiconductors upside
Applied Materials is benefitting from multiple tailwinds as of today such as the global chips shortage as well as the rapid advancement of emerging technologies like 5G and IoT. All these are fuelling very strong and sustainable demand for semiconductors.
The management stated that with the broader adoption of 5G-handsets, silicon content in smartphones is growing at double-digit rates. Additionally, in the automotive sector (one of the worst-hit sectors in terms of chips shortages), total semiconductor consumption is expected to expand by more than 15% in 2021. Moreover, the company's ICAPs business that serves the IoT, communications, auto, power and sensor markets is expected to grow at a fast pace and potentially exceed $3 billion in revenue for the fiscal year.
The management is also optimistic about the increase in foundry spending and shifts in the customer mix. In their words, the supply-demand fundamentals by cloud service providers look favorable for DRAM as well as the future 3D inflections in DRAM can be a huge growth driver. The emergence of data centers will continue to be a major contributor to the company's top-line growth.
Actionable Insight Accelerator
In April 2021, the company unveiled the AIx (Actionable Insight Accelerator), an innovative platform that accelerates the discovery, development and commercial deployment of new chip technologies. This enables engineers to see into semiconductor processes in real-time, carry out a large number of measurements across wafers and individual chips and optimize multiple process variables to improve semiconductor performance, power, area cost and time to market (PPACt).
AIx uses a combination of big data and artificial intelligence to help the company's clients in various stages such as research and development, ramp-up and high-volume manufacturing. Additionally, the new platform is well-equipped in improvising semiconductor performance, power, area costs and time-to-market by helping in the optimization of several process variables. Considering all these features, it is evident that AIx is expected to bolster Applied Materials in the semiconductor fabrication space.
Valuation
It is truly astounding to see that a stock trading at below $50 levels hardly 12 months ago is now over $130. This triple-digit growth can be attributed to the ongoing strength in the semiconductor business, the growing demand for new technologies and the company's strategic innovations.
In terms of valuation, while Applied Materials' enterprise-value-to-revenue multiple of 6.54 appears well above the average for the semiconductors space, it is also true that the company's margins are well above other chip companies. This is also the reason why its price-earnings ratio of 31.32 does not appear too elevated in my opinion. While the stock may seem pricey, I believe that it is an excellent momentum play given the prevailing business environment within the semiconductors industry.
Disclosure: No positions.
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