Solid demand momentum for several applications across various markets is driving the growth of wafer fab equipment (WFE) leader, Applied Materials (AMAT). Its third-quarter fiscal 2021 results reflected strong performance in Semiconductor Systems, driven by solid demand for semiconductors. This writer is bullish on the stock.
Moreover, customer spending in foundry and logic is increasing, thanks to a favorable macroeconomic environment due to the growing need for specialty nodes in automotive, power, 5G rollout, IoT, communications, and image sensor markets. This is encouraging, regarding the prospects of Applied Materials. The company’s foundry/logic business, which is a part of its Semiconductor Systems, was the fastest-growing area. (See Applied Materials Dividend Date and History on TipRanks)
Pandemic-led restrictions on outdoor movements amplified the sales of laptops and gaming consoles. As economies reopen, a surge in the demand for personal vehicles, which we believe is partly due to the fear of crowded public transport, has increased the demand for automobile semiconductors as well.
Now, the ongoing global shortage of semiconductor chips is leading automakers to make a run for chips in the consumer electronics industry. This is leading to increased orders for chip factory tools from Applied Materials.
Management at Applied Materials expects this uptrend to continue in the near term, which is good news for the company and its investors.
Applied Materials, however, is facing a unique problem. In order to maintain Moore’s Law (every two years, speed and strength of computers increases while its price decreases) while further shrinking devices, semiconductor companies have had to innovate on the process as well as materials technology, thus expanding the wafer fab equipment market. This has been a boon for Applied Materials so far. However, in the last cycle, Moore’s Law has decelerated across logic, DRAM, and NAND devices.
Nonetheless, Needham analyst Quinn Bolton reiterated a Buy rating on the stock, with a price target of $153, despite the negative catalysts looming over the industry. “We remain bullish on the name as we believe Applied Materials will outperform peers in 2022 due to a structurally favorable WFE mix next year,” Bolton said.
The analyst anticipates 38% growth in 2021, and 7% growth in 2022, for WFE, year-over-year. He expects Applied Materials to continue holding a 22% market share and maintain its balanced mix of logic/foundry and memory segments.
Bolton noted that the company’s mix of logic/foundry and memory end-market businesses is healthy and its product portfolio strong. This, he believes, is expected to maintain the flow of growth, stability, and profitability for Applied Materials in the forthcoming years.
The Wall Street consensus is also optimistic about Applied Materials, with a Strong Buy based on 10 Buys and 3 Holds. The average Applied Materials price target of $159.50 implies 25.4% upside potential from current levels over the next 12 months.
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
