After a nasty downturn in 2022, shares of top semiconductor manufacturing equipment maker Applied Materials (AMAT 2.98%) have rallied over 40% so far in 2023 and are again approaching all-time highs. This in spite of the company reporting stalling sales this year as many of its chip fab (a factory that manufactures chips) customers pause on construction plans to manage their cash flow.
Investor optimism has been fueled by a coming wave of new chip fabs now under construction, as well as even more existing fab upgrades that will need to be filled with lots of new machinery. To meet growing demands from the semiconductor industry, Applied Materials recently announced new processes, equipment, and a new chipmaking platform. This stock still looks like a buy to me.
More chips, more complexity
Semiconductors are the most complicated manufactured product there is, and the challenges are only getting more complex. The world has an insatiable hunger for silicon as chips are the powerhouse behind literally almost everything these days. Global annual chip sales are expected to reach $1 trillion by the end of this decade (a nearly 70% increase from 2022 levels), and along the way, many of those chips will get more advanced and difficult to make.
Meanwhile, like other manufacturing industries, chip fabs also have goals to get more efficient -- both for environmental impact reasons, as well as to keep their operating expenses in check to keep fueling higher profitability (thus keeping shareholders happy).
More chips, more complexity, and more efficient machines are adding fuel to a coming boom in chip fab construction. Industry association SEMI.org has predicted some $500 billion will have been invested in new global fab construction by 2024, propped up by governments around the world interested in solidifying their at-home chipmaking capabilities. Researcher McKinsey thinks $260 billion or more could be invested in chip fabs in the U.S. alone by the end of the decade.
Applied Materials is the leader in fab equipment, having the broadest portfolio and the highest sales. It may have gone sleepy as of late, but financial results are expected to get cooking in earnest again in 2024.
Data by YCharts.
New machines, and a new machine platform, have arrived
To that end, Applied Materials just announced a number of new processes and equipment that can handle more advanced chips. Specifically, these machines are geared toward what's called "heterogeneous chip integration" (or just "HI"). As the name implies, HI helps manufacturers (and their ultimate customers that need them to build computers and other intelligent devices) combine diverse chips into new packages.
Sometimes called "chiplets," think of these as Lego pieces that build a more complex chip system, using 2.5D (two or more chips side-by-side on the same substrate) and 3D (two or more chips stacked on top of each other) architecture. This is a departure from traditional monolithic chip architecture, where a single piece of silicon acts as the complete computing circuit.
A chart showing Applied's new or updated equipment for packaging "chiplets." Image source: Applied Materials.
Perhaps even more significant, though, was the announcement of a new manufacturing platform called Vistara, which the company says is its most significant equipment platform advancement in a decade. Applied touts three major features of Vistara:
- The platform is customizable in different configurations of chambers -- specific types of equipment can be "plugged in" to handle the many dozen or sometimes hundreds of steps involved in making a silicon wafer.
- Vistara has thousands of sensors that feed into Applied's AI-powered software, which helps customers improve development of new chip recipes, and increase yield and speed of their manufacturing process.
- Vistara's footprint is up to 30% smaller than previous platforms, and consumes up to 30% less energy to help fabs reduce their carbon footprint and reduce use of other chemicals needed in the chipmaking process.
Applied Materials' new Vistara platform. Image source: Applied Materials.
Time to buy?
As with any new manufacturing process or equipment, it takes time for these things to trickle down into the fabs of customers. Applied made other equipment announcements early this year, and the story is similar with those machines as well. Perhaps by 2024, there will be significant enough new incremental revenue to report.
Nevertheless, Applied has been funneling cash into research and development for years, and those efforts are beginning to near fruition. And if Applied's track record holds true, those invested dollars will pay off very well.
Data by YCharts.
Applied Materials stock currently trades for about 20 times trailing-12-month earnings per share, and just under 19 times expected 2024 earnings per share. It looks to me like the market is underestimating the benefit this company will get as all those new fabs being built get filled up with machinery. I remain a buyer of this top player in the semiconductor equipment market.
