Semiconductor Giants ASML and Applied Materials Poised for Growth Amid AI Boom

Is It Finally Time to Buy This Beaten-Down Artificial Intelligence (AI) Stock? | The Motley Fool

A recent update from management suggests that this semiconductor company could come out of its rut and deliver healthy, long-term growth. ASML Holding (ASML -1.97%) is one of the most important companies in the semiconductor industry as its equipment plays a mission-critical role in helping foundries and chipmakers in manufacturing chips, but the stock's performance so far this year has been underwhelming. While the PHLX Semiconductor Sector index has recorded solid gains of almost 16% this year (as of this writing), shares of ASML are down 14%. The stock fell big time last month following the release of its third-quarter earnings as management's 2025 outlook turned out to be lower than what Wall Street was looking for. However, ASML held its Investor Day meeting on Nov. 14, and it looks like management's comments are having a positive impact on the company's stock market fortunes. More specifically, ASML stock rose almost 3% following its Investor Day. Let's see why that was the case. When ASML released its Q3 results last month, it guided for 2025 revenue of 30 billion euros to 35 billion euros. The company trimmed the higher end of its earlier guidance, which called for 2025 revenue of 30 billion euros to 40 billion euros, driven by slower recovery in certain semiconductor end markets such as smartphones and personal computers (PCs). The Dutch semiconductor giant also pointed out that limited-capacity additions by memory manufacturers are also going to impact its growth next year. However, ASML did point out that AI will remain a key growth driver despite the headwinds in other markets. According to CEO Christophe Fouquet: With regard to market conditions, while we continue to view AI as a key driver of the industry recovery with potential upside, we see other segments recovering more slowly than anticipated. The recovery will extend well into 2025, which is leading to customer cautiousness and some pushouts in their investments. ASML management spoke on the same lines during its investor day meeting, stating that "the emergence of AI creates a significant opportunity for the semiconductor industry," and the company could "deliver significant revenue and profitability growth" thanks to the proliferation of this technology. As a result, ASML has reiterated its 2030 revenue guidance of 44 billion euros to 60 billion euros, along with a gross margin of 56% to 60%. The company had originally issued this guidance a couple of years ago. So, ASML's forecast indicates that the company's long-term growth forecast is still intact in spite of a short-term hiccup next year. Management points out that the booming demand for AI servers is going to be a key growth driver for the company. More specifically, ASML management estimates that sales of AI servers could increase at an annual rate of 18% from 2025 to 2030, generating $350 billion in revenue at the end of the forecast period. More importantly, sales of smartphones and PCs are expected to improve as well in the long run. ASML estimates that the smartphone market could clock an annual growth rate of 5% through 2030, while the PC market could witness a 4% annual growth over the same period. All these factors are expected to lead to robust growth in wafer demand in the future. More specifically, ASML expects annual demand to grow by 780,000 wafer starts per month (WSPM) every year from 2025 to 2030. WSPM refers to the output of a semiconductor plant, so the increase in this capacity means that the demand for ASML's machines should remain robust going forward. As such, it won't be surprising to see the company eventually achieve its 2030 targets. If ASML can hit the midpoint of its 2030 guidance and achieves 52 billion euros in revenue, its top line would nearly double from this year's estimated figure of 28 billion euros. That would translate into a compound annual growth rate of almost 11%. Moreover, the midpoint of the gross margin range of 56% to 60% in 2030 would also be a nice improvement over the 52% figure it is forecasting for 2025. All this indicates that ASML is on track to clock healthy top- and bottom-line growth going forward thanks to the secular growth of the semiconductor market, which it believes could cross $1.05 trillion in revenue in 2030 from $679 billion in 2025. ASML's poor stock market returns in 2024 mean that investors can get their hands on this semiconductor stock at a relatively attractive valuation. The stock is now trading at 34 times trailing earnings, a discount to its five-year average earnings multiple of 42.5. Also, the forward earnings multiple of 27 points toward an improvement in its bottom line, and the reading is lower than the tech-laden Nasdaq-100 index's forward earnings multiple of 30.7. So, savvy investors looking to add an AI stock to their portfolios can consider accumulating ASML given its sunny, long-term prospects. Of course, the stock's performance can be affected by the short-term challenges in the semiconductor industry, but it is worth remembering that the company's machines help make advanced chips that go into applications such as AI, which is why it would be a smart idea to keep the bigger picture in mind.

Missed Out on Investing in Nvidia? Here's 1 Artificial Intelligence (AI) Chip Stock to Buy on the Dip | The Motley Fool

Applied Materials looks cheap, and it's at the forefront of computing innovation. The market has been infatuated with Nvidia for a few years now. So much so that this month, it has once again become the largest company in the world by market capitalization, with a net worth of more than $3.5 trillion. The artificial intelligence (AI) boom has been a huge benefit to the business, and with the stock up more than 10x in just a few short years, it would be understandable for investors who didn't get in earlier to think they missed the boat. So what's an investor to do now if they want to open a new position that will let them ride the AI wave? One promising AI stock that has taken a tumble this year is Applied Materials (AMAT -0.49%). The semiconductor equipment maker is getting hit due to a slowdown in sales to China, but smart investors will know that this is just a temporary headwind for a business with a wide moat. Here's why now is the time to buy the dip on Applied Materials. Many investors know by now that Nvidia -- like numerous other companies -- designs computer chips that are used extensively in modern life. From data centers to smartphones to virtual reality glasses, the world is powered by semiconductors. Building advanced semiconductors takes a lot of innovation, and making them progressively smaller and more powerful requires intricate and advanced machines. This is where Applied Materials steps in. Without getting into the nitty-gritty details, the company produces the equipment and software that semiconductor manufacturers use to package, etch, and form their chips. Its technology allows fabricators to produce chips with higher performance, lower electricity consumption, and a smaller surface area -- attributes prized in the semiconductor industry. Given how important these factors are in building chips, Applied Materials is able to charge a lot for its machines and the service contracts that come with them. Over the last four reported quarters, it has generated $27 billion in revenue from customers around the globe. Applied Materials' financial performance has been phenomenal over the long term. Its free cash flow over the last four quarters was $7.5 billion, and it has been cash-flow positive over every 12-month period in the 21st century. Even though Applied Materials operates in a cyclical industry, it has been able to consistently generate positive cash flow due to how important its machines are to manufacturers. With all the cash coming into the business, the company has been able to repurchase a lot of stock. Since 2003, it has reduced its outstanding share count by more than 50%, which helped it grow its earnings per share (EPS) and free cash flow per share. For investors, these are two of the most important metrics to track as they are what create shareholder value over the long term. Free cash flow per share is up by almost 800% over the last 10 years. Investors have sold off Applied Materials stock due to its sharply declining China revenue in its latest fiscal quarter. During its fiscal Q4, which ended Oct. 27, its China revenue fell to $2.1 billion compared to $3 billion in the same period a year ago. Semiconductor manufacturers in China are ordering a lot of machines due to threatened or existing export restrictions from the United States. Investors see those trade restrictions as a major headwind for a segment that accounted for 30% of Applied Materials revenue last quarter. While this is a concern in the short term, the world will need more computer chips regardless of where they are manufactured. If the tools to make them are less available to companies operating in China, then their production will happen in other nations. But Applied Materials will still find demand for its highly sought-after machines. After the recent sell-off, Applied Materials is now trading more than 33% below its all-time high. Its stock trades at a trailing price-to-earnings ratio (P/E) of 20 and a forward P/E of 17.7, based on analyst estimates -- well below the S&P 500 index's average P/E of 30. For a company that should grow along with the booming semiconductor market, these earnings ratios seem far too cheap. So buy up some shares of Applied Materials stock on this dip, and hold onto them for the long haul.

Is It Finally Time to Buy This Incredibly Cheap Semiconductor Stock Following Its Latest Crash? | The Motley Fool

The year went from bad to worse for Applied Materials (AMAT 0.70%) investors last week when shares of the company crashed 9% following the Nov. 14 release of its fiscal 2024 fourth-quarter results (for the three months ended Oct. 27). Though the semiconductor equipment supplier's revenue and earnings exceeded expectations, the outlook wasn't solid enough to satisfy Wall Street. Not surprisingly, investors pressed the panic button. Applied Materials stock has now lost 34% of its value since hitting a 52-week high in early July this year. However, there were certain silver linings for investors in Applied Materials' latest results. Let's take a closer look at the sharp pullback in the company's stock price to see if it's a buying opportunity for investors. Applied Materials' fiscal Q4 revenue jumped 5% year over year to a record $7.05 billion, while adjusted earnings increased 9% to $2.32 per share. Analysts would have settled for $2.19 per share in earnings on revenue of $6.97 billion, but the strong demand for the company's manufacturing equipment needed for making artificial intelligence (AI) chips helped it beat expectations. For instance, sales of the company's foundry and logic equipment increased 12% from the prior-year period on account of the growing demand for gate-all-around (GAA) transistor nodes, which are being used by the likes of Samsung to manufacture AI chips. GAA technology should improve going forward as it is the successor to the fin field-effect transistor (FinFET) technology. GAA is said to be more powerful and efficient than FinFET technology and it is expected to help chipmakers make advanced chips for multiple applications ranging from AI to graphics cards to gaming to automotive to 5G connectivity. On its latest earnings conference call, Applied Materials CEO Gary Dickerson remarked: Overall, the transition from a FinFET-based node to node with gate-all-around transistors and backside power distribution grows Applied's available market from around $12 billion to approximately $14 billion for every 100,000 wafer starts per month of capacity. More importantly, Dickerson is confident that the company will be able to "capture more than 50% of the process equipment spending for the gate-all-around nodes." Applied Materials generated $2.5 billion in revenue thanks to the demand for GAA equipment in fiscal 2024, a number that it expects to double in the new fiscal year. However, the weak spending in other semiconductor end markets such as communications, automotive, and the Internet of Things is weighing on the company. Sales of equipment serving these markets fell on a year-over-year basis in the previous quarter. As a result, Applied Materials' guidance turned out to be mixed. The company is forecasting $2.29 per share in earnings in the current quarter at the midpoint of its guidance range, which is slightly better than the $2.27 per share consensus estimate. The $7.15 billion revenue guidance is slightly short of the $7.25 billion consensus estimate. However, the guidance points toward a slight improvement in Applied Materials' growth. Its top line is on track to increase by 6.5% from the year-ago quarter, while non-GAAP earnings would increase by 7.5%. Given that Applied Materials' top line increased by just 2% in the previous fiscal year to $27.1 billion along with a 6% increase in earnings to $8.61 per share, the guidance for the current quarter suggests that the company is about to get off to a better start in fiscal 2025. Analysts expect a double-digit increase in the company's revenue and earnings in the ongoing fiscal year. While analysts expect Applied Materials to deliver stronger growth in fiscal 2025 despite potential headwinds, Applied Materials management expects an improvement in those underperforming segments as well, which means that its actual revenue and earnings growth could be stronger than anticipated. If that's indeed the case, it won't be surprising to see a turnaround in the company's fortunes on the stock market. That's why investors may want to consider buying Applied Materials while it's currently trading at around 19.6 times trailing earnings -- a discount to the tech-heavy Nasdaq-100 index's earnings multiple of 33. What's more, Applied Materials carries a 12-month price target of $231, according to 36 analysts covering the stock. That would be a 37% jump from current levels. There is a good chance that this semiconductor stock could hit that mark in the coming year on the back of strong demand for AI chips, as well as a potential turnaround in other semiconductor segments. Investors, therefore, are getting a good deal on Applied Materials stock considering the potential upside it may be able to deliver.