Analysts unveil new Applied Materials price targets on AI earnings boost

AI needs chips. And chipmakers need equipment. Enter Applied Materials.

Feb 16, 2024 - 20:30

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Analysts unveil new Applied Materials price targets on AI earnings boost

Updated at 8:48 AM EST

Applied Materials (AMAT) shares powered higher in early Friday trading as analysts weighed in on the chip equipment maker's stronger-than-expected fiscal-first-quarter-earnings report, which underscored the long-term potential of AI-related demand.

Advances in artificial intelligence are finding their way into virtually every corner of the tech sector, with investments planned to boost performance, and increase profits, from giant cloud-computing providers to "touch-and-speak" interactive menus at fast food restaurants.

Realizing that potential, however, will require massive investments in both the chips and semiconductors that power the AI technologies and the machines that help design and produce them.

Applied Materials, like its European rival ASML, (ASML) falls into the latter camp by providing the equipment to produce the chips for everything from flat-panel TVs to personal computers to smartphones.

Investment ramps from the so-called hyperscalers, or large cloud-computing-service providers, continues to drive the lion's share of AI investment. Morgan Stanley analysts, in fact, see cloud capital-spending growth rising 26% from 2023 levels this year, marking the biggest increase for the so-called Big 4 (Amazon, Google, Microsoft and Meta Platforms) since 2018.

Chip equipment maker Applied Materials has added nearly $100 billion to its market value over the past 18 months.
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And those investments will ultimately trickle down to the sectors on which Applied Materials has the strongest hold, such as memory and ICaps, which refers to chips for internet-of-things, communications, automotive, power and sensors applications.

AMAT CEO: AI needs more chip power to unlock potential

"The full potential of technologies like AI cannot be unlocked without next-generation chips with better performance, power, and cost," Applied Materials CEO Gary Dickerson told investors on a conference call late Thursday.

"Our perspective hasn't changed at all relative to how we see the market," he added. "There are some powerful drivers in the digital transformation of every industry. ... we still see semiconductors at $1 trillion by 2030."

Applied Materials is starting to see the early fruits of that investment effort, forecasting current-quarter revenue in the region of $6.5 billion, well ahead of Wall Street forecasts, and adjusted earnings of between $1.79 and $2.15 per share.

Adjusted earnings for the three months ended in December, the group's fiscal first quarter, came in at $2.13 per share, firmly ahead of Wall Street's $1.79 consensus forecast, with revenue largely flat with a year earlier at $6.71 billion.

"Remarkably, Applied Materials stands alone vs. peers in growing revenue and EPS through ostensibly the worst memory cycle in decades," said KeyBanc Capital Markets analyst Steve Barger, who carries a sector weight rating on the stock.

"Applied Materials also held an upbeat conference call, saying conditions are improving with cloud-investment accelerating, fab-utilization rates increasing across all device types, and memory-inventory levels normalizing," he added.

That tone, as well as the underlying AI investment thesis, is driving a host of price-target changes for Applied Materials from analysts on Wall Street.

Applied Materials 'well positioned,' says JPMorgan

Mizuho Securities analyst Vijay Rakesh added $40 to his price target, taking it to $225 a share, while Citigroup lifted its objective by $41 to $211 a share.

Needham analyst Charles Shi added $60 to his price target, taking it to $240, while affirming his buy rating on the stock.

JPMorgan, meanwhile, added $60 to take its target to $230 a share. The investment firm noted that the equipment maker is "well-positioned to benefit from multiple upcoming technology inflections that should drive outperformance vs [wafer fab equipment] over the next several years."

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Barger at KeyBanc, however, remains cautious on the stock over the near-term, saying he was "not inclined to chase as it may take time for results to grow toward embedded expectations."

"We think [the] shares are already reflecting a robust cyclical inflection, which is not yet fully apparent; an expectation for multiple years of strong EPS growth; and potentially a valuation rerating," he wrote.

Applied Materials shares were marked 9.7% higher in premarket trading to indicate an opening-bell price of $205.82 each, a move that would extend the stock's six-month gain to around 50%.

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