For the semiconductor industry, now is a time for building as some ambitious chipmaking facilities (or "fabs") get underway. Companies like Taiwan Semiconductor Manufacturing and Intel, among others, are scooping up generous government aid as countries aim for supply chain resilience.
Intel in particular hopes to be the first to enter the "angstrom era," a nod to the shrinking of the smallest features of chips beyond the nanometer (an angstrom is 10 nanometers, with 10 million nanometers equaling one centimeter).
One pick-and-shovel play in this race is Applied Materials (AMAT 0.50%). Fresh off a fantastic 2023 -- and with a new wave of growth likely right around the corner -- the chip manufacturing equipment maker could be an overlooked buy as artificial intelligence (AI) systems put new demands on high-performance chips.
The slow but steady bet on AI?
Applied Materials develops, makes, and sells a broad range of machinery used to manufacture semiconductors. In fact, it has the broadest portfolio of chipmaking equipment, and a large software and services segment, that is absolutely essential for companies that do the actual chip fabrication.
The company finished its fiscal 2023 in tip-top fashion, considering the chip manufacturing industry was in a temporary downturn in the past year. While Nvidia vacuumed up seemingly every shred of data center computing infrastructure sales during this period, Applied Materials pivoted to supplying equipment to chipmakers selling components to what was then a still-booming electric vehicle market.
But now the needs of rising AI systems, and perhaps a return of the data center market excluding AI systems, are on the rise. A new growth cycle for Applied Materials' most advanced equipment is brewing.
The company recently unveiled more details about its Centura Sculpta machine, designed to extend the capabilities of enormously expensive lithography machines from ASML Holding in the manufacture of advanced chips. Applied Materials says it's ready for the angstrom era and beyond, and it's engaged with every leading logic chipmaker as it further develops the capabilities of Sculpta.
Of course, at this particular juncture, Applied Materials is anything but a high-growth AI play. Revenue in its latest quarter was actually flat year over year. Management has not provided specific full-year 2024 revenue guidance, though the average Wall Street analyst is predicting 11% growth to nearly $30 billion, for what it's worth. Underpinning that is Applied's management team waxing positive on demand from its customers this year and next.
Achieving 11% growth this year, if analysts are correct, isn't exactly the fastest pace. But what it lacks in all-out growth potential, Applied more than makes up for in profitability. Its free cash flow is booming as a long stretch of research and development begins to pay off for AI and other new semiconductor manufacturing needs.
Data by YCharts.
After raising its quarterly dividend payment by 23% in 2023, management just announced a 25% increase on top of that in March 2024. The annualized yield is currently only 0.8%, but it's nevertheless been an epic run for investors seeking cash payments from their stocks. Over the last six years, Applied Materials' annual dividend payout has increased more than 200%.
Data by YCharts.
This AI stock might actually be pretty cheap
With AI set to increase the difficulty of making advanced chips, and other secular growth trends like EVs and industrial automation far from over, Applied Materials could continue to be a stable growth and dividend investment for years to come. It has a stellar balance sheet with $7.5 billion in cash and short-term investments, another $2.9 billion in long-term investments, and debt of just $5.5 billion.
Suffice to say, this business has ample resources it can tap to keep its trajectory headed in the right direction. And while it may not be as cheap as it was in 2022 and 2023, when there were deals aplenty in the chip industry, Applied Materials certainly isn't expensive at this juncture.
Shares trade for about 25 times current-year expected earnings. There's possible upside to Applied Materials' consensus earnings expectations in the years ahead as customers like TSMC and Intel retool their fabs with equipment from the likes of Applied Materials for the next generation of advanced manufacturing technology.
I'm happy to continue holding my longtime position in Applied Materials as a new era powered by AI gets rolling. I'll look to nibble some more later this year after the company provides more details on the cadence of its next growth cycle.
