Demand for chips that provide the computing power to train and support artificial intelligence (AI) models is rising rapidly as governments and technology companies around the world compete to deploy AI applications. That's exactly the reason Nvidia has recorded a massive jump in sales and profits in recent quarters.
Nvidia's AI graphics processing units (GPUs) are in such high demand relative to supply that customers are reportedly waiting between 36 and 52 weeks for shipments of its flagship H100 processors. Not surprisingly, the chipmaker is looking to increase production capacity for these AI chips, which could allow it to continue its stellar share price rise.
However, Nvidia's gains of 239% over the past year have left the stock expensively valued, with a price-to-sales ratio of 40 and a trailing earnings multiple of 96. Of course, Nvidia's forward earnings multiple of 36 shows that it is The stock is expected to deliver huge earnings growth, while its 5-year price-to-earnings-growth (PEG) ratio of just 0.7 means the stock is actually undervalued compared to expected growth.
Still, certain investors may want to look for cheaper alternative assets to buy to capitalize on the AI boom. I would point this out to these investors Applied materials (AMAT -1.29%) – a company that will benefit from Nvidia's efforts to increase its AI chip production.
Applied Materials benefits from AI-driven semiconductor spending
Applied Materials produces semiconductor manufacturing equipment that enables chipmakers and foundries to produce chips and integrated circuits. It generates a nice portion of its revenue from sales to Samsung, Taiwan semiconductor manufacturingAnd Intel.
In fiscal year 2023 (ended October 29, 2023), Samsung and Taiwan Semiconductor Manufacturing, also known as TSMC, combined to account for 34% of Applied Materials' revenue. Intel's contribution was less than 10%. Given that these companies are looking to increase spending on semiconductor equipment in 2024, it wasn't surprising that Applied Materials' latest results were better than expected.
Applied Materials reported its first-quarter fiscal 2024 results on Feb. 15. In that period, which ended Jan. 28, the company's revenue was nearly flat year-over-year at $6.7 billion — but that was better than the $6.48 billion consensus estimate. Non-GAAP earnings rose 5% year-over-year to $2.13 per share, comfortably beating Wall Street's estimate of $1.91 per share.
Management's guidelines turned out to be the icing on the cake. Applied Materials expects fiscal second-quarter earnings of $1.97 per share, midway through its guidance range, on revenue of $6.5 billion. Analysts expected earnings of $1.79 per share on revenue of $5.9 billion. However, Applied Materials noted that “cloud companies' capital investments are picking up, fab utilization is increasing across device types, and storage inventories are normalizing,” which explains why the company's outlook is better than expected.
AI, in particular, increases the company's addressable opportunities. Applied Materials, for example, estimates that demand for high-bandwidth memory (HBM) used in AI servers could grow by 50% annually in the coming years. The company also notes that the semiconductor chip required to produce HBM is more than twice the size of a standard dynamic random access memory (DRAM) chip. Therefore, chip manufacturers must significantly increase their capacities to keep up with growing HBM demand.
Meanwhile, the advanced chip packaging process used to make AI chips is also giving Applied Materials a boost. In the latest earnings call, CEO Gary Dickerson said:
In fiscal year 2024, we expect our HBM packaging sales to be four times higher than in the previous year and to rise to almost $0.5 billion. And across all device types, we expect revenue from our advanced packaging product portfolio to increase to approximately $1.5 billion.
Applied Materials also notes that the increasing deployment of powerful AI data centers will trigger mass production of gate-all-around transistors (GAA), which are 30% more efficient than fin-shaped field-effect transistors (FinFET). The company estimates that its addressable market could grow “by $1 billion per 100,000 wafer starts per month.” [GAA transistor] Capacity.”
Not surprisingly, Applied Materials' largest customer, Samsung, quickly adopted GAA to produce advanced chips using the 3nm process node. Additionally, the GAA transistor market is reportedly growing at 39% annually. This is a good sign for Applied Materials, as the company says it is “on track to gain share and capture over 50% of the spending on the process equipment used in this new transistor module.”
An acceleration in growth could push the share price higher
Applied Materials expects fiscal 2024 revenue of $26.1 billion, nearly equal to fiscal 2023 revenue of $26.5 billion. However, the company's first-quarter performance and current-quarter guidance suggests the company could deliver better-than-expected results amid an improving spending environment.
It's also worth noting that Applied Materials' earnings increased year-over-year. However, analysts expect fiscal 2024 earnings to fall to $7.73 per share from $8.05 per share last year. Again, the company's fiscal first quarter balance sheet and current quarter guidance, which is midway close to second quarter 2023 adjusted earnings of $2.00 per share, suggest that the company is in could provide a positive surprise in this regard.
More importantly, analysts are forecasting a significant increase in Applied Materials' sales and profits for fiscal year 2025.
AMAT sales estimates for current fiscal year data from YCharts.
Applied Materials currently trades at 22 times trailing earnings – a big discount to Nvidia's trailing earnings multiple. Of course, Nvidia is growing much faster, but conservative investors looking for a cheaper AI stock right now might consider Applied Materials. Given the AI-powered increase in semiconductor spending, it may not be available at such attractive levels in the future.
After all, Applied Materials is up 6% following its most recent quarterly report and appears well-positioned to maintain that momentum and start an uptrend.