Technology stocks turned out to be good for investors in 2021 as the NASDAQ-100 Technology Sector index recorded astounding gains. Applied Materials (AMAT 1.46%) was one of those tech companies that helped investors get rich by delivering eye-popping upside on the back of impressive growth in revenue and earnings.
Applied Materials' outstanding stock market performance last year isn't surprising, as it is solving a key problem that's hurting several industries ranging from smartphones to automotive to gaming consoles and personal computers -- the global chip shortage.
The company makes semiconductor manufacturing equipment and also provides ancillary services to semiconductor manufacturers to boost their productivity. This explains why there has been a sharp spike in the company's top and bottom lines over the past year as semiconductor manufacturers have been scrambling to boost capacity to meet surging demand.
Semiconductor sales are set to soar once again
Applied Materials can replicate its terrific run this year. The demand for chips is expected to explode once again in 2022 as sales of smartphones, gaming consoles, cars, wearable devices, and other products are expected to head higher. A report from trade credit insurance company Euler Hermes estimates that semiconductor sales could exceed $600 billion for the first time this year, up from $553 billion in 2021.
The firm adds that the semiconductor industry's revenue jumped 26% last year, indicating that Euler Hermes has a conservative growth forecast for the current year. However, don't be surprised to see semiconductor sales grow at a faster pace in 2022 for a few simple reasons.
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For instance, 5G smartphone shipments are expected to hit 810 million units this year, according to IDC's estimate. For comparison, an estimated 500 million 5G smartphones were sold last year. Given that 5G smartphones are carrying more chip content as compared to their 4G predecessors, they are on track to create more demand for semiconductors in 2022. More specifically, high-end smartphones are expected to contain $275 worth of chips by 2025 as compared to $170 in 2020.
Similarly, the automotive industry is using significantly more chips now than before, and that trend is likely to continue thanks to electrification and the advent of autonomous driving. Applied Materials estimates that the chip content in cars could increase by 50% to $690 worth in 2025 as compared to 2020 levels.
All of this indicates that the semiconductor industry is set for another year of robust growth, which is why chipmakers will have to pull up their socks and invest more money into upgrading their equipment or adding more capacity. Arm Holdings CEO Simon Segars estimates that semiconductor manufacturers are spending $2 billion a week to boost capacity. This estimate is in line with the semiconductor industry association SEMI's estimate of $100 billion in equipment spending this year.
Applied Materials, therefore, is in a solid position to sustain its fast pace of growth in 2022. Especially as it provides equipment that helps manufacture chips, and those chips are critical in the production of consumer electronics devices such as iPhones and PlayStations.
Applied Materials' terrific growth is here to stay
Applied Materials' revenue in fiscal 2021 (which ended on Oct. 31, 2021) was up 34% over the prior year. The company had also reported a 64% increase in adjusted earnings last fiscal year to $6.84 per share. The good part is that Applied Materials' outlook for the current quarter indicates that its growth streak will continue.
The company anticipates $1.85 per share in earnings this quarter on revenue of $6.2 billion at the midpoint of its guidance range. That would translate into year-over-year revenue growth of 20% and earnings growth of 33% over the prior-year period's figures of $5.2 billion in revenue and $1.39 per share in earnings.
More importantly, Applied Materials has built a robust backlog that should help it sustain its growth. The company pointed out in its November 2021 earnings conference call that it finished the year with an order backlog of $11.8 billion, up 77% from the year-ago period. Comparatively, Applied Materials had generated $23 billion in revenue last fiscal year. So, the company has secured a backlog that's worth 51% of its fiscal 2021 revenue right at the beginning of the new fiscal year.
Analysts expect Applied Materials' revenue to increase 15% in fiscal 2022, while earnings are expected to jump 19%. Although, the first-quarter guidance and the backlog indicate that it could do better than what Wall Street expects.
The stock is a great value right now
Applied Materials is a hot growth stock that investors can buy right now at a cheap valuation. While the NASDAQ 100 Index sports a price-to-earnings ratio of nearly 40, Applied Materials is trading at 24 times earnings.
Since the company is on track to solve a big problem faced by the global semiconductor industry and grow at impressive rates once again in 2022, it looks like a steal at its current valuation. That's why investors looking to add a fast-growing tech stock to their portfolios can easily consider buying Applied Materials, as it seems set for more upside in the new year.
