Applied Materials (AMAT -2.95%) stock has stepped on the gas over the past five months despite the challenges posed by the pandemic, making it a top growth investment that has delivered terrific gains.
Applied Materials' recovery can be attributed to the broader semiconductor industry's recovery, which has created a strong demand for the company's fabrication equipment. That's evident from the recent fiscal third-quarter results that blew past Wall Street's expectations, and the good part is that its hot rally may not be over just yet.
What's working for Applied Materials?
Applied Materials recorded 23% year-over-year sales growth for the quarter that ended on July 26. Its revenue of $4.40 billion was well above the $4.19 billion consensus estimate, while adjusted earnings of $1.06 per share topped expectations of $0.95.
The company's guidance also bolstered investor confidence. Applied Materials anticipates revenue of $4.60 billion in the fiscal fourth quarter at the midpoint of its guidance range, which would be good for another quarter of more than 20% growth over the prior-year period. Adjusted earnings are expected to fall between $1.11 and $1.23 per share, up substantially from $0.80 per share last year.
The guidance clearly indicates that Applied Materials' impressive growth is sustainable through the rest of the year. That's not surprising as the company's key semiconductor systems business (accounting for two-thirds of total revenue) is riding on some strong catalysts.
Semiconductor systems clocked $2.92 billion in revenue last quarter, a jump of 28% year over year, but Applied Materials estimates that the best is yet to come for this segment as most of the growth is geared toward the second half of the calendar year.
For the fiscal fourth quarter, Applied Materials estimates that the semiconductor systems business will record 31% growth, thanks to a transition to new chip technologies and market share gains. In the DRAM (dynamic random access memory) conductor etching market, for instance, Applied Materials estimates that it can corner "greater than 50% of the available market." That's good news as DRAM accounted for 22% of semiconductor systems revenue last quarter.
Dan Durn, Applied Materials' CFO, says that the company is also enjoying similar tailwinds in the foundry/logic space that supplies 55% of semiconductor systems revenue. He remarked on the latest earnings call:
In foundry, we're significantly outperforming in the market. We're winning critical new applications in advanced patterning, and we're working closely with customers to develop next-generation transistors and interconnects using innovative approaches like our Integrated Materials Solutions. This is strengthening our leadership in foundry/logic and also giving us new application wins in memory, where we're outperforming in the market as well.
In all, Applied Materials sees a bump in semiconductor investments this year as chipmakers gear up to address the growing demand for various applications such as 5G wireless networks, the Internet of Things, and artificial intelligence. The market for 5G chipsets, for example, is anticipated to clock a compound annual growth rate of 63% through 2027 per Grand View Research. The size of the market was just $1.1 billion last year.
Similarly, the market for artificial intelligence chips is anticipated to jump from $7 billion in 2018 to more than $91 billion in 2025, according to another estimate. The high rates of growth in these markets indicate that the demand for chip-making equipment should keep rising and create a favorable environment for Applied Materials.
Still a good buy
Investors looking to take advantage of Applied Materials' potential growth can still buy the stock at attractive levels. Its forward price-to-earnings (P/E) ratio of 15.6 looks enticing for a stock that's recording impressive results and also pays a decent dividend.