(AMAT - Free Report
) , the giant semiconductor equipment maker, has seen its shares make an amazing recovery in 2019 -- even before the industry sales and profits confirmed their cycle lows.
To illustrate this, consider that in the middle of 2018, the EPS consensus for AMAT's next fiscal year (starting in Nov 2018) was $4.50. Then in the second half of 2018, estimates plunged on trade war worries and concerns that ole' bogey man, the semiconductor cycle, had just peaked.
Applied Materials, maker of wafer fabrication equipment (WFE) that helps chip companies like Micron
(MU - Free Report
) make their wares, completed their FY19 (ended October) with full year EPS of just $3.04. But long before then, AMAT shares surged nearly 60% from the low $30s to mid $50s.
2019 was certainly a confusing time to be a chip investor. And it didn't necessarily get easier to understand when AMAT reported their Q419 on November 14 and shares jumped to fresh all-time highs above $60 as the company revealed a healthy upside boost to 2020 earnings guidance.
My colleague Ben Rains wrote about the results last month...
Applied Materials is a semiconductor equipment firm that has been on a tear in 2019 despite the fact that its sales and earnings fell for four straight periods. The company with a $55 billion market cap is a leader in “materials engineering solutions” that are used to make “virtually every new chip and advanced display in the world.”
The Santa Clara, California-headquartered firm is, of course, not alone in the notoriously cyclical semiconductor and chip industry. Big-names such as Nvidia
(NVDA - Free Report
) also posted four straight periods of declining revenues. But this is not totally unusual for chip firms, especially when they come up against hard-to-compare periods of outsized success.
Luckily, Applied Materials and others such as industry giant Intel
(INTC - Free Report
) impressed Wall Street with their guidance. And the reason is relatively simple: everyone from Apple
(AAPL - Free Report
) to Microsoft
(MSFT - Free Report
) rely on semiconductors and they will remain essential backbones of the technological revolution for years to come.
AMAT’s first quarter fiscal 2020 guidance came in well above Wall Street estimates, as signs of a recovery in demand continue. “Applied Materials’ fourth quarter results reflect a healthy uptick in demand for semiconductor equipment, combined with strong execution across the company,” Applied Materials CEO Gary Dickerson said in prepared remarks.
“The semiconductor industry is increasingly adopting a new playbook for improving chip performance, power, area and cost, and we are investing in unique solutions to enable our customers’ success in the AI-Big Data era.”
(end of excerpt from Ben's November article)
From Cycle Peaks Come Cycle Troughs
After the company presentation and reinvigorated outlook, Wall Street analysts lifted AMAT EPS consensus 14% for FY20 (started in Nov) from $3.30 to $3.77, representing 24% growth.
On the topline, revenues are expected to recover 14% to $16.65 billion (the FY18 peak was $17.25B). And so it looks like the dreaded "semi cycle" was short and sweet -- if you held on to your stocks during the December 2018 rout.
And CEO Gary Dickerson knows why. In fact, he's known for years. Here's what Lizzy Gurdus wrote for CNBC in September 2017 after an interview with “Mad Money” host Jim Cramer...
Dickerson said that waiting for operating system upgrades and new mobile phone iterations may define the tech cycles of today, but the main focus will soon turn to the race for competitive AI.
“In the future, you’ve got transportation, health care, entertainment. All of these will change in amazing ways and create trillions of dollars of economic value. So you also have this war for AI architecture leadership that probably will be the biggest battle of our lifetime,” the CEO said.
Dickerson knows that big-data and AI progress will keep driving demand for more-advanced semiconductor capabilities and configurations, thus fueling a Renaissance of hardware development and investment.
Exponential AI is Exhausting Capacity
Prodigious technology analyst and writer Tiernan Ray (formerly of Barron's) covered for ZDNet.com
a recent Silicon Valley conference of semiconductor executives discussing what to do about "the explosion in demand for deep learning forms of A.I. that is pushing at the limits of today’s chips."
Applied Materials, the dominant maker of tools to fabricate transistors, sponsored a full day of keynotes and panel sessions on Tuesday, called the "A.I. Design Forum," in conjunction with one of the chip industry's big annual trade shows, Semicon West.
After talking about the dramatic slowdown in Moore's Law to sub 5% performance improvement, Ray wrote "Dickerson went on to claim that A.I. workloads in data centers worldwide could come to represent as much as 80% of all compute cycles and 10% of global electricity use in the next decade or so."
This paragraph from Ray's article struck me as especially interesting because it describes Dickerson's challenging role in having to figure out what equipment a Micron will need for the next generations of memory chips...
That means the industry needs to seek many routes to solutions, said Dickerson, including "new architectures" for chip design and new kinds of memory chips. He cited several types of memory, including "MRAM," "ReRAM," (resistive RAM), "PCRAM," (phase-change RAM), and "FeRAM." The industry would also have to explore analog chip designs, chips that manipulate data as continuous, real-valued signals, rather than discrete units, and new kinds of materials beyond silicon.
While AMAT shares may have exceeded the company's return to growth from a "semi" cycle recession, it's clear that Dickerson & Co. are locked-on to the dominant trends of what I call the Technology Super Cycle
And with a stock market set to make more new highs in 2020, AMAT will be one to definitely buy on the dips.
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