Applied Materials (AMAT 2.27%) is a well-known name in the semiconductor industry. Its products and solutions are playing a key role in solving the global chip shortage. But investors may not be aware that it is also a solid metaverse play.
The metaverse, which aims to transport users into a three-dimensional world where they can connect and collaborate with each other in real time, will need the support of a company like Applied Materials to expand. That's because the metaverse is going to create massive demand for semiconductors.
Lots of semiconductor chips will be needed to power high-performance computing data centers to serve 3D worlds in real-time, along with devices such as virtual reality headsets, sensors, and haptic gloves. Applied Materials is one of the best ways to tap this potential opportunity because it provides manufacturing equipment and services to semiconductor foundries to boost their productivity.
Not surprisingly, it was a top performer on the stock market last year as companies rushed to buy its offerings to alleviate the global semiconductor shortage. However, 2022 has started off on a negative note for Applied Materials. The stock price is down 16% so far this year, and investors could be anticipating a turnaround when Applied Materials releases its fiscal 2022 first-quarter earnings report on Wednesday, Feb. 16.
But that turnaround seems a tad difficult considering the supply chain constraints the company is facing.
Applied Materials' results may not be up to the mark
According to the guidance issued by Applied Materials in November 2021, the company expects Q1 revenue of $6.16 billion at the midpoint of its forecast range, along with adjusted earnings of $1.85 per share. Wall Street, however, is looking for slightly higher earnings of $1.86 per share on revenue of $6.17 billion.
It is worth noting that Applied Materials' revenue and earnings could increase 19% and 34% year over year, respectively, if it hits the midpoint of its guidance range. But investors may overlook the robust year-over-year growth if supply chain constraints weigh on Applied Materials' performance and cause it to miss expectations.
The company had missed analysts' expectations by a big margin when it had released its fiscal 2021 fourth-quarter results in November, and such a possibility cannot be ruled out once again. On the November earnings conference call, CEO Gary Dickerson commented, "We expect supply shortages of certain silicon components to persist in the near term, meaning that we don't expect to fully meet demand in Q1."
The CEO also added that Applied Materials' supply chain headwinds would persist in fiscal 2022. So there is a possibility that the company's financial results and the accompanying guidance may not be as strong as expected. As a result, there is a likelihood of investors pressing the panic button and sending Applied Materials stock lower. But savvy investors should consider using such an opportunity to buy more shares of this semiconductor play.
Let's see why.
Secular growth drivers will power long-term growth
I have already discussed how the metaverse could spur the growth of the semiconductor industry. In fact, there are companies that have already started manufacturing chips targeting the metaverse, and more could join the fray as the technology gains momentum.
Taiwan Semiconductor Manufacturing (TSM 1.32%), one of Applied Materials' largest customers, is already preparing to power the metaverse by ramping up the production of chips based on advanced process nodes. The foundry giant believes that augmented reality (AR) and virtual reality (VR) headsets could ultimately replace smartphones in the long run, though they will need to be lighter and boast robust computing power.
This shows why TSMC is ramping up spending on making chips based on smaller process nodes this year. The Taiwanese company has a capital expenditure budget of $40 billion for 2022, up from $30 billion last year, and it is expected to spend a big chunk of that money on shoring up manufacturing infrastructure for 3-nanometer and 2-nanometer chips. These chips based on smaller nodes ideally carry more computing power and are more power-efficient, as they pack more transistors into a smaller footprint.
Applied Materials is in a solid position to benefit from TSMC's spending on more advanced chips to power the metaverse, as the Taiwanese giant produced 15% of the former's revenue last fiscal year. Meanwhile, the overall growth in semiconductor demand, in the long run, is going to be another secular growth driver for Applied Materials.
All this shows why analysts expect Applied Materials' earnings to increase at an annual rate of 16% for the next five years. However, it won't be surprising to see it clocking a faster pace of growth given the massive end-market opportunities such as the metaverse that could lead to higher semiconductor demand.
As such, investors should consider capitalizing on any pullback in Applied Materials stock following its earnings results since it seems built for long-term growth. Shares of the company are currently trading at 21 times trailing earnings and 16 times forward earnings, and there may be an opportunity for investors to get into this tech stock at even cheaper levels if its report is not up to the mark.