Sun. Nov 27th, 2022

High-performance data centres, virtual reality headsets, sensors, and haptic gloves will all require a significant amount of semiconductor chips if 3D worlds in real time are to be served. One of the best ways to take advantage of this opportunity is through Applied Materials, which provides semiconductor foundries with manufacturing equipment and services to increase productivity.

Since there was a global shortage of semiconductors, it was no surprise that it was a top performer on the stock market last year. Applied Materials, on the other hand, has had a bad start to the year. Applied Materials’ stock price is down 16% so far this year, and investors may be hoping for a turnaround when the company reports its first-quarter earnings for fiscal 2022 on Wednesday, Feb. 16.

However, given the company’s supply chain constraints, that turnaround seems a little more difficult.

Results from Applied Materials

Applied Materials forecasts Q1 revenue of $6.16 billion and adjusted earnings of $1.85 per share at the midpoint of its forecast range in November 2021. On a revenue of $6.17 billion, Wall Street, on the other hand, expects slightly higher earnings of $1.86 per share.

If Applied Materials achieves its mid-point guidance, revenue and earnings could rise by 19% and 34%, respectively, over last year. If Applied Materials’ performance falls short of expectations due to supply chain constraints, investors may overlook the company’s strong year-over-year growth.

When the company released its fourth-quarter results for fiscal 2021 in November, it fell far short of analysts’ expectations by a wide margin, and a repeat performance cannot be ruled out. CEO Gary Dickerson said on the November earnings conference call, “We expect supply shortages of certain silicon components to persist in the near term, which means we don’t expect to fully meet demand in Q1.”

Applied Materials’ supply chain issues will continue into fiscal 2022, according to the company’s CEO. That means the company’s financial results may not be as strong as expected, and the accompanying guidance may not be as accurate. The stock of Applied Materials could fall as a result of investors feeling threatened and pressing the panic button. However, astute investors should take advantage of such a sale to increase their holdings in this semiconductor company.

Long-term Growth Fueled

There is a lot of potential for the semiconductor industry to grow as a result of the metaverse. In fact, a number of companies have already begun producing metaverse-targeting chips, and more may follow suit as the technology gains traction.

TSM, one of Applied Materials’ largest customers, is already ramping up production of chips based on advanced process nodes in order to power the metaverse. Virtual reality (VR) and augmented reality (AR) headsets could replace smartphones in the long run, according to Samsung, but they need to be lighter and more powerful.

This explains why TSMC is increasing its investment in chip production based on smaller process nodes in 2013. This year, the company plans to spend $40 billion on capital expenditures, an increase from $30 billion the year before, with the majority of that money going toward improving the manufacturing infrastructure for 3-nanometer and 2-nanometer chips, respectively. As a result of their smaller transistor count and higher efficiency, these chips based on smaller nodes are better able to hold more computing power and use less power.

Tsmc’s investment in advanced chips to power the metaverse will benefit Applied Materials, which generated 15% of its revenue last fiscal year from TSMC. Applied Materials, on the other hand, will benefit from the long-term increase in semiconductor demand.

For the next five years, analysts expect Applied Materials’ earnings to grow at a rate of 16%. However, given the massive end-market opportunities, such as the metaverse, that could lead to increased semiconductor demand, it won’t be surprising to see it grow at a faster rate.

Given that Applied Materials stock appears designed for long-term growth, investors should consider taking advantage of any pullback following its earnings results. Shares of the company are currently trading at 21 times trailing earnings and 16 times forward earnings, and there may be an opportunity for investors to get into this tech stock at even lower levels if the company’s report is not up to the standard.

By Adam

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