Semiconductor equipment supplier Applied Materials (AMAT 3.83%) is my top growth pick for 2021. That's because the company has put itself in a great position to take advantage of a jump in demand for chips used in smartphones, automobiles, artificial intelligence, the Internet of Things, and more.
These tailwinds have helped Applied Materials stock get off to a terrific start in the new year, and it could switch into a higher gear once the company releases its fiscal 2021 first-quarter results on Thursday.
Let's see what's expected of Applied Materials and why the stock could get a shot after its next quarterly earnings report.
Its hot streak is expected to continue
Applied Materials has been witnessing solid demand for its semiconductor fabrication equipment and related services. These tailwinds helped the company close fiscal 2020 on a high, with revenue increasing 18% for the year.
The company expects to kick off fiscal 2021 on a stronger footing, with revenue expected to jump 19% year over year to $4.95 billion in the first quarter. Applied Materials expects adjusted earnings to land at $1.26 per share at the midpoint of its guidance range -- a nice jump over the prior-year period's earnings of $0.98 per share.
However, Applied Materials could surpass its own expectations, since it has been growing at a faster pace than the broader market. According to SEMI, an industry association, spending on foundry equipment jumped 12% in 2020 to $23.2 billion. Applied Materials finished 2020 with foundry revenue of $6.7 billion, up 42% from $4.7 billion in 2019.
A similar scenario unfolded in the memory business. SEMI forecasts that dynamic random access memory (DRAM) spending jumped 4% in 2020. Applied Materials generated $2.28 billion in revenue from the DRAM equipment business, up 15% compared to the previous year.
The good news is that DRAM equipment spending is expected to jump 39% in 2021, driven by demand from 5G smartphones, graphics cards, and personal computers. Strong DRAM demand is already causing a tight supply of memory chips, and this may encourage memory manufacturers to boost output.
What's more, there is a major chip shortage around the world that is causing a loss of sales for automakers, gaming console manufacturers, and PC (personal computer) component manufacturers. Semiconductor equipment suppliers such as Applied Materials can take advantage of this opportunity, as manufacturers will be forced to invest in new equipment or upgrade existing machinery to boost capacity.
Terrific guidance could be in the cards
Applied Materials is expected to step on the gas considering these favorable end-market conditions. Consensus estimates peg Applied Materials' fiscal second-quarter year-over-year revenue growth at 24% to $4.91 billion. Earnings are expected to jump from $0.89 per share in the second quarter of fiscal 2020 to $1.26 per share in the current quarter.
So, Applied Materials will have an ambitious guidance target to meet when it releases its results. But investors shouldn't forget that the company exited the fourth quarter of fiscal 2020 with a record backlog of orders worth $6.7 billion. At the same time, it would be worth noting that overall spending on semiconductor fabrication equipment is expected to jump 13% in 2021 as per SEMI, higher than last year's estimated increase of 8%.
As such, Applied Materials can sustain its high levels of growth for the remainder of 2021. This could add to the impressive upside that the stock has delivered already and make it more expensive to buy. That's why now would be a good time for investors to buy this growth stock, as it still trades at a reasonable 27 times trailing earnings and 21 times forward earnings.