The continued increase in data center spending by the world's largest tech companies has sent many artificial intelligence (AI) stocks soaring over the last six months. That has some investors looking further down the supply chain for opportunities.
Micron Technology, which designs and manufactures memory components for graphics processing units (GPUs) and AI accelerators, saw its stock soar recently. Taiwan Semiconductor Manufacturing, the largest contract semiconductor foundry, experienced considerable price appreciation as well.
But even further down the supply chain is another company that's poised to benefit as well. And although shares are already up more than 100% in the last six months, investors still have an opportunity to buy the stock at a fair price. Here's why investors should take a closer look at Applied Materials (AMAT 3.97%).
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Essential equipment for the AI boom
Applied Materials is the largest supplier of semiconductor wafer fabrication equipment in the world. It competes across categories, enabling it to place multiple tools in a foundry and take market share from its competitors, which are typically more specialized.
As a result, it brings in more revenue and is able to invest more in research and development (R&D) to continue growing its share of an expanding market. The company invested $3.6 billion in R&D last year. Competitors Lam Research spent just $2.3 billion, and KLA spent $1.4 billion.
Applied Materials is seeing a huge tailwind from the increased spending on AI chips. TSMC announced plans for $52 billion to $56 billion in capital expenditures (capex). Micron said it will spend $20 billion; SK Hynix said investors should "expect considerable increase" in capex this year.
NASDAQ: AMAT
Key Data Points
With plans for big increases in spending from the world's largest chip manufacturers this year, Applied Materials is poised to be one of the biggest beneficiaries. Management said it expects 20% growth in equipment sales this year, with it rising in the back half of the year and continuing into 2027. The company has seen gross margins expand as demand increases, and it expects to produce further margin expansion in 2026.
That growth will likely slow later in the decade as the market absorbs the new chipmaking capacity, but Applied Materials should still be able to produce steady growth as it benefits from a larger installed base that needs servicing, replacements, and upgrades. At 32 times forward earnings expectations, the stock might look expensive to some. But with expectations for 20% revenue growth in each of the next two years and strong profit margins that come with a high-demand environment, the stock looks fairly priced. It's not too late to buy even after its strong run-up in price over the last six months.
