What happened
Semiconductor equipment supplier Applied Materials (AMAT +3.58%) rose 22.2% in February, according to data provided by S&P Global Market Intelligence. The company benefited not only from a strong earnings report in the middle of the month, but also from strong results from peers and customers that forecast heavy spending on semiconductor equipment this year.
Image source: Getty Images.
So what
Applied Materials started off the month strong, riding the tailwind from the late January earnings report from key customer Taiwan Semiconductor Manufacturing (TSM 0.88%). TSM is the largest semiconductor foundry in the world, and a key Applied customer. On TSM's earnings call, which already revealed strong growth, management forecast a whopping $25 billion to $28 billion in capital expenditures in 2021 to satisfy overwhelming demand. That's a 52% increase at the midpoint over the prior year! More capex at TSM means more revenue and profits for Applied Materials.
Applied then reconfirmed the bullish trend with blowout earnings in the middle of the month, with 24% revenue growth and 42% adjusted earnings growth over the prior year. Management also forecast 4.5% sequential revenue growth and 8% sequential earnings growth next quarter. Given that Applied usually guides conservatively, I wouldn't be surprised to see it surpass those numbers. It appears that demand for Applied's machines continues to explode amid this year's semiconductor shortage.
Now what
While the semiconductor equipment industry has been known to be cyclical, it usually makes higher highs and lower lows over time, as the world becomes more digitized. We're definitely in boom times right now, which could make some cautious. However, CFO Dan Durn pointed out at a recent conference that last year, companies spent about $60 billion in front-end semiconductor equipment, but he forecasts $70 billion in 2021, with a path to $100 billion around 2025.
If that happens, Applied's earnings could easily double from here, so long-term investors shouldn't necessarily wait for the next downturn to add this long-term grower.
