April 17, 2024

Brighton Journal

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Did you miss the opportunity to buy Nvidia? 1 Artificial Intelligence (AI) chip that must be purchased before you start climbing

Did you miss the opportunity to buy Nvidia?  1 Artificial Intelligence (AI) chip that must be purchased before you start climbing

Demand is rapidly growing for chips that provide the processing power to train and support artificial intelligence (AI) models as governments and technology companies around the world race to deploy AI applications. And this is exactly why Nvidia It has seen a huge jump in its revenues and profits in recent quarters.

Nvidia GPUs are in high demand compared to supply, with customers reportedly having to wait between 36 weeks and 52 weeks for shipments of flagship H100 processors. Not surprisingly, the chipmaker is looking to increase production capacity for those AI chips, which could allow it to maintain its premium stock price appreciation.

However, Nvidia's 239% gain over the past year has left the stock trading at expensive valuations, with a price-to-sales ratio of 40 and a trailing earnings multiple of 96. Of course, Nvidia's forward earnings multiple of 36 shows that it is expected to grow Great for earnings, while a 5-year price/earnings-to-growth ratio (PEG ratio) of just 0.7 means the stock is undervalued compared to the growth it is expected to deliver.

However, some investors may want to look for cheaper alternative investments that they can purchase to take advantage of the AI ​​boom. I would like to point out these investors Applied materials (deaden -1.29%) – A company that will benefit from Nvidia's efforts to increase its production of artificial intelligence chips.

Applied Materials benefits from spending on AI-driven semiconductors

Applied Materials produces semiconductor manufacturing equipment that allows chipmakers and foundries to manufacture chips and integrated circuits. It gets a large portion of its revenue from sales to Samsung, Taiwan Semiconductor Manufacturing Co., LtdAnd Intel Corporation.

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In fiscal year 2023 (which ended October 29, 2023), Samsung and Taiwan Semiconductor Manufacturing Company, also known as TSMC, together accounted for 34% of applied materials revenue. Intel's contribution was less than 10%. Given that these companies are looking to increase spending on semiconductor equipment in 2024, it was not surprising to see Applied Materials' recent results better than expected.

Applied Materials released its first-quarter fiscal 2024 results on February 15. For that period, which ended on January 28, the company's top line was roughly flat year over year at $6.7 billion — but that was better than $6.48 billion. Estimate consensus. Non-GAAP earnings rose 5% year over year to $2.13 per share, easily crushing Wall Street estimates of $1.91 per share.

The management directive turned out to be the icing on the cake. Applied Materials expects fiscal second-quarter earnings of $1.97 per share at the midpoint of the guidance range, on revenue of $6.5 billion. Analysts were looking for $1.79 per share earnings on $5.9 billion in revenue. However, Applied Materials noted that “there is a reacceleration of capital investment by cloud companies, FAB usage is increasing across all device types and memory inventory levels are normalizing,” which explains why the company's outlook is better than expected.

Artificial intelligence, in particular, increases opportunities for a company. For example, Applied Materials estimates that demand for high-bandwidth memory (HBM) deployed in AI servers could grow at an annual rate of 50% in the coming years. The company also points out that the semiconductor die required to manufacture HBM is more than twice the size of a standard dynamic random access memory (DRAM) die. So, chipmakers need to significantly increase their capabilities to keep up with the growing demand for HBM.

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At the same time, the advanced chip packaging process used to manufacture AI chips is also giving a boost to applied materials. On the most recent earnings conference call, CEO Gary Dickerson said:

In fiscal 2024, we expect our HBM packaging revenues to be four times greater than last year, growing to approximately $0.5 billion. Across all device types, we expect revenue from our advanced packaging portfolio to grow to approximately $1.5 billion.

Applied Materials also notes that the increasing deployment of high-performance AI data centers will lead to mass production of gate all-in-one (GAA) transistors, which are 30% more efficient than fin field-effect transistors (FinFET). The company estimates that its target market could expand “by $1 billion per 100,000 chip starts per month.” [GAA transistor] capacity.”

Not surprisingly, Samsung, Applied Materials' largest customer, was quick to adopt GAA to make advanced chips using its 3nm process node. Furthermore, the market for GAA transistors is said to be growing at an annual rate of 39%. This bodes well for Applied Materials as the company claims it is “on track to gain share and capture more than 50% of the spending on the processing equipment used in this new transistor module.”

Accelerating growth may lead to a rise in the stock price

Applied Materials expects revenue of $26.1 billion for fiscal 2024, roughly consistent with fiscal 2023 revenue of $26.5 billion. However, the company's first-quarter performance and guidance for the current quarter suggest it could deliver better-than-expected results in an improving spending environment.

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It's also worth noting that Applied Materials' earnings increased year over year. However, analysts expect that in fiscal 2024, its earnings will decline to $7.73 per share from $8.05 per share last year. Once again, the company's final Q1 financial performance and guidance for the current quarter, which is close to Q2 2023 adjusted earnings of $2.00 per share at the midpoint, suggest it could deliver a positive surprise on this front.

More importantly, analysts expect a good jump in Applied Materials' revenues and profits for fiscal 2025.

AMAT revenue estimates for the current fiscal year Data by YCharts.

Applied Materials is trading at 22 times trailing earnings right now — a significant discount to Nvidia's earnings multiple. Of course, Nvidia is growing at a much faster pace, but conservative investors looking for cheaper AI stocks to buy now could consider Applied Materials. Given the AI-fueled jump in semiconductor spending, it may not be available at such attractive levels in the future.

After all, Applied Materials jumped 6% after its most recent quarterly report, and appears to be well-positioned to maintain that momentum moving forward.