Shares of semiconductor capital equipment maker Applied Materials (AMAT 2.98%) rallied 22.7% in February, according to data from S&P Global Market Intelligence. As the most diversified semicap equipment vendor, Applied usually serves as a good barometer of the health of the overall semiconductor industry.
Applied's Feb. 15 report came at a point of conflicting narratives across semis. Large, mature parts of the industry, such as PCs and smartphones, are mired in a long slump. And demand for electrification and electric vehicle (EV) trailing-edge chips just started a downturn, too. But artificial intelligence (AI) chip demand is obviously increasing, and China is making strategic purchases of trailing-edge equipment.
Applied's results seemed to indicate the worst may be behind the industry, with the tantalizing potential of an AI-led recovery pushing shares higher.
Earnings and Sam Altman's crazy vision lift shares
In its fiscal first quarter, Applied reported $6.7 billion in revenue, about flat from the prior year, with adjusted (non-GAAP) earnings per share (EPS) of $2.13, up 5%. Both figures came in well ahead of expectations, as did next quarter's guidance of $6.5 billion, which would be down quarter over quarter but ahead of analyst expectations of $6.3 billion.
Sales of equipment for AI chip and memory production, along with sales to China, surged in the quarter, even as other end markets were soft. But many believe the PC and smartphone markets may be getting ready for a recovery, especially as pandemic-year PC and phone purchases begin to age and AI-infused devices make their way to the market next year.
Management also pointed out how well Applied is positioned to capture market share amid current and upcoming technology inflections, such as gate-all-around transistors, backside power, and advanced packaging, which will all be crucial in making next-generation chips for AI.
And Applied's stock got a boost even before the positive report after OpenAI CEO Sam Altman was reported to be seeking trillions of dollars in funding for a new AI chipmaking venture -- yes, that's trillions with a "T." Altman seemingly believing the world will need significantly more chipmaking factories to power his vision of AI's future may have encouraged investors to increase their expectations of demand growth for Applied Materials machines in the years to come.
One of the best compounders in the biz
Despite its February surge to all-time highs, Applied still trades at only 25 times earnings. And those trailing earnings are likely the trough of the last cycle.
It's probably assured that Applied's earnings will grow from here as the overall industry recovers from the post-pandemic slowdown. The big question is the strength and length of that recovery. If the artificial intelligence revolution adds significant incremental demand for semiconductors, as Sam Altman appears to believe it will, Applied's next growth upswing could be more robust than even historical semiconductor booms.
