Applied Materials (AMAT Quick QuoteAMAT - Free Report) shares are up 10% since the company's February 15 earnings report that delivered another set of strong quarterly results and guidance. Analysts consequently raised earnings estimates and price targets, pushing shares back to a Zacks #1 Rank and keeping it there for the past six weeks.

AMAT develops, manufactures, markets and services semiconductor wafer fabrication equipment and related spare parts for the worldwide semiconductor industry. Customers for these products include semiconductor wafer manufacturers and semiconductor integrated circuit (IC) manufacturers, who either use the ICs they manufacture in their own products or sell them to other companies.

These ICs are the key components in most advanced electronic products such as computers, telecommunications devices, automotive engine management systems and electronic games.

UBS: New Display Tools Drive Capex and Growth

Back in February, UBS raised its price target on Applied Materials from $40 to $42 after the company guided its April quarterly sales and non-GAAP EPS to $3.5 billion and $0.76, both higher than the Wall Street consensus of $3.3 billion and $0.63, respectively.

The investment bank was encouraged by the company's innovations in equipment used to produce organic light-emitting diode, or OLED, displays. According to a WSJ report, Apple is planning to use an OLED display from Samsung Electronics for its next iPhone.

OLED displays are reported to be much better than traditional LCD panels. This would be great for the company which is a key supplier Samsung’s huge chip-fabrication business.

UBS analyst Stephen Chen said "We believe Applied can continue to outgrow display capex trends if it introduces new display tools such as an evaporation tool this year."

And on March 20, following his attendance at China Semicon, Chen upgraded his views on AMAT and boosted his price target to $44. StreetInsider.com provided the following notes from the UBS report...

China Semicon: 900+ Booths Hungry for Expansion

"We attended China Semicon this week in Shanghai and remain comfortable with our 2018 China capex estimates of $9.8B (up 80% yoy). Our most positive meeting was with Huali, an indigenous foundry. Huali reported its fab 2 started construction recently and will spend $5.9B for 40k wpm of capacity.

"Applied had an upbeat tone at its technical presentation at China Semicon. Applied's focused on customer migration from 2D to 3D-NAND; highlighted its new tools including Precision CVD, Sym3 Etch, Selectra Etch. We believe Applied can benefit from higher capex by indigenous China fabs going forward.

"Valuation: Buy rated with a 12-month price target of $44 Our PT is based on applying a 15x P/E to our FY18 EPS of $2.93. Our target multiple is at the high end of its historical range of 10-18x but in line with its peer group with share gains in semicap and display possibly driving more expansion opportunities."

Stifel: Multi Year Growth Story Still in Early Stages

Analysts at Stifel Nicolaus also love the growth story here and raised their price target to $42 in February. Here's what they had to say...

"Following Applied Materials 1Q17 (Jan) earnings results/conference call, we came away reaffirmed on the company’s growth prospects in 2017 and our long-term thesis on the name. We believe the company is once again well positioned to outperform industry growth rates in both semi equipment and in display equipment. Moreover, we believe that we are still at the early stages of a multi-year growth story with the company.

"In our view, the company’s operating model continues to improve and this in turn, will keep stock multiples attractive and the momentum in the stock moving forward as well. Applied has been our most preferred name for some time and even with lofty expectations, the story continues to get better. We maintain our Buy rating on the shares."

The investment bank accordingly raised their full year estimates for EPS from $2.74 to $3.00, and for revenues from $12.95 billion to $13.4 billion.

Multiple Growth Drivers

My colleague Neena Mishra wrote about AMAT as Bull of the Day in mid December. Here was one section of her article worth repeating...

According to AMAT management, major market catalysts that will continue to drive growth in the coming years are the leading edge foundry in logic, 3D NAND, patterning, and advance display in China.

The company continues to gain market share in the semiconductor equipment market. Additionally, in the past few years, the company has successfully diversified its business which is no longer PC demand driven. Additional demand drivers have emerged in the areas of big data, Internet of Things (IoT), cloud infrastructure, artificial intelligence, virtual reality and self-driving cars.

Put it all together and AMAT remains a key semi equipment supplier and innovator to own during this strong economic/technology cycle.

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