Why Applied Materials shares rose 22.2% in February
Semiconductor equipment supplier Applied materials (NASDAQ: AMAT) rose 22.2% in February, according to data provided by S&P Global Market Intelligence. The company benefited not only from a strong earnings report in the middle of the month, but also from strong results from its peers and customers who forecast heavy spending on semiconductor equipment this year.
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Applied Materials has started the month on a strong footing, benefiting from key customer’s late January earnings report Semiconductor manufacturing in Taiwan (NYSE: TSM). TSM is the world’s largest semiconductor foundry and a key Applied customer. When TSM’s earnings announcement, which has already shown strong growth, management forecasted $ 25 billion to $ 28 billion in capital spending in 2021 to meet overwhelming demand. This is an increase of 52% at the mid-point compared to the previous year! More investment at TSM means more revenue and profit for Applied Materials.
Applied then reconfirmed the uptrend with skyrocketing earnings in the middle of the month, with revenue growth of 24% and adjusted earnings growth of 42% from a year ago. Management also expects sequential revenue growth of 4.5% and sequential earnings growth of 8% in the next quarter. Since Applied generally guides in a conservative way, I wouldn’t be surprised to see it exceed those numbers. It appears that demand for Applied’s machines continues to explode amid this year’s semiconductor shortage.
While the semiconductor equipment industry is known for be cyclical, it typically reaches higher highs and lower lows over time as the world becomes more and more digitized. We are definitely in a boom period right now, which might make some people cautious. However, CFO Dan Durn pointed out at a recent conference that last year companies spent around $ 60 billion on front-end semiconductor equipment, but he is forecasting $ 70 billion in 2021, with a trajectory to $ 100 billion by 2025.
If that happens, Applied’s profits could easily double from here, so long-term investors wouldn’t necessarily have to wait until the next downturn to add this long-term producer.
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Billy Duberstein owns shares of Applied Materials and Taiwan Semiconductor Manufacturing and has the following options: short term, March 2021, sell $ 95 on Applied Materials. Its clients may own shares of the companies mentioned. The Motley Fool owns shares and recommends Taiwan Semiconductor Manufacturing. The Motley Fool recommends the materials applied. The Motley Fool has a disclosure policy.
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