The booming demand for semiconductors and the proliferation of fifth-generation (5G) smartphones are going to be hot technology trends for the next five years.
The world's appetite for semiconductors is exploding, which is why the global chip shortage that's currently plaguing several industries is expected to last for the next two years, at least. Similarly, smartphone users are upgrading to 5G devices at a breathtaking pace. The good news for investors is that they can take advantage of these fast-growing tech trends with the help of Applied Materials (AMAT -0.28%) and Cirrus Logic (CRUS -1.40%).
Let's look at the reasons why these tech stocks are solid bets on the semiconductor and 5G smartphone markets.
Applied Materials has been on fire as the demand for its semiconductor fabrication equipment has grown impressively over the past year thanks to a surge in chip demand. The company recorded $6.2 billion in revenue in the third quarter of fiscal 2021 (which ended on Aug. 1, 2021), up 41% year over year, while non-GAAP earnings per share soared 79% to $1.90.
Applied Materials' fiscal fourth-quarter revenue guidance of $6.33 billion and earnings guidance of $1.94 per share would translate into a 35% year-over-year top-line jump and a 55% bottom-line increase. Clearly, the booming demand for chip manufacturing equipment is turning out to be a massive tailwind for the company as the anticipated acceleration in its growth this quarter suggests.
Investors, however, should note that Applied Materials' hot growth is here to stay for a long time to come. That's because sales of the kind of semiconductor manufacturing equipment that Applied Materials makes are expected to exceed $100 billion in 2022 following this year's estimated jump of 34% to $95.3 billion, according to industry association SEMI. This trend of high semiconductor capital equipment spending could continue beyond next year, as nearly $700 billion worth of chips are expected to be sold in 2026 as compared to $427 billion last year, according to a third-party estimate.
Semiconductor foundries are ramping up their capital investments to meet this anticipated surge in demand. TSMC had pointed out in April this year that it would be spending $100 billion to enhance production capacity over the next three years. Chip giant Samsung has also outlined a $151 billion investment through 2030 for increasing its chipmaking capacity.
SK Hynix, another South Korean chipmaker, had announced a $106 billion investment earlier this year to develop a new manufacturing complex. What's more, the company said in May that it is willing to expand its semiconductor investment. All of this indicates that the healthy growth in the semiconductor capital equipment market is here to stay. More importantly, the above-mentioned chipmakers are customers of Applied Materials, putting the company in a nice position to take advantage of the end-market opportunity.
The good news for investors is that they can buy Applied Materials stock at an attractive valuation right now. The stock's trailing price-to-earnings (P/E) ratio of 24 and forward earnings multiple of 18 are lower than the S&P 500's multiple of 31. And, with the company's earnings expected to grow at an annual pace of more than 20% for the next five years, buying it right now looks like a no-brainer given the long-term opportunity it stands to gain from.
Cirrus Logic is touted to be one of the big winners of Apple's (AAPL -0.34%) latest iPhone 13 models. Barclays recently upgraded Cirrus Logic stock from equal to overweight citing content gains at Apple, which was its largest customer last quarter with 72% of its total revenue.
Cirrus' huge reliance on Apple turned out to be a boon last year as the iPhone 12's success boosted its financial performance. A similar scenario can be expected this year -- and beyond -- as a combination of higher-volume shipments and the content gains at Apple are likely to drive Cirrus' top- and bottom-line growth.
That's because Apple's iPhone shipments are expected to increase to 237 million units in 2022 from an estimated 234 million units this year, according to Credit Suisse. The investment bank forecasts 249 million iPhone shipments for 2023. Cirrus is expected to be a direct beneficiary of this growth as Barclays sees the chipmaker gaining more business from Apple in the coming years.
Cirrus has been supplying audio amplifiers and codecs to Apple, and Barclays analyst Blayne Curtis believes that the iPhone maker could buy chips for camera and power applications as well. This could be a big deal for Cirrus as Apple is one of the top players in the 5G smartphone market.
According to Strategy Analytics, Apple reportedly holds 29% of the 5G smartphone market. The tech giant's share is expected to jump to 40% after the launch of the iPhone 13. Additionally, it is worth noting that 5G iPhones reportedly account for just 1% of Apple's total iPhone installed base of just over 1 billion units, which paves the way for long-term growth in the company's shipments.
Meanwhile, market research firm IDC estimates that 5G smartphones could account for 69% of the overall smartphone market volume in 2025, up from an estimated 40% this year. With global smartphone shipment volumes expected to hit 1.54 billion units in 2025 -- up from 2021's estimate of 1.38 billion -- the 5G smartphone market has a lot of room for growth. Apple's strong market share here has the potential to make Cirrus one of the top 5G stocks to buy right now, though there is another reason why you may want to do that.
Cirrus Logic's penetration at Android smartphone OEMs (original equipment manufacturers) is increasing. In its July shareholder letter, management pointed out that it "saw our devices proliferate in additional flagship and mid-tier Android smartphones," shipping components in volumes in both Android smartphone tiers.
In all, Cirrus could turn out to be a play on the broader 5G smartphone market and not just Apple. The stock is now trading at 24 times trailing earnings and 17 times forward earnings -- which is identical to Applied Materials' multiples and represents a discount to the S&P 500 index. So, now would be a good time to go long and buy Cirrus Logic, as it seems set for multiyear growth thanks to 5G smartphones.