Nvidia's $3 trillion market cap has raised questions about its room for growth, but its semiconductor supplier Applied Materials, with a market cap of $170 billion, likely has more potential.
Applied materials (ENORMOUS) It primarily produces the complex machinery used to manufacture chips. The company has three segments: semiconductor systems, global applied services, and display and adjacent markets.
The semiconductor segment is the company's core business and generated $19.7 billion in net sales in fiscal 2023, accounting for 74% of the total. The global services segment and the display segment contributed 22% and 3% of net sales, respectively, according to the company's 2023 annual report.
Applied Materials' major customers include Taiwan Semiconductor (TSM) Samsung (SSNLF) and Intel (INTC) In fiscal year 2023, Taiwan Semiconductor accounted for 19% of the company's net sales, with Samsung contributing 15%. Intel accounted for less than 10%.
Related: Big names dump Nvidia stock as ai giant stumbles ahead of earnings
Semiconductors play a crucial role in the ai wave. OpenAI needs tens of thousands of Nvidia chips (NVDA) chips to develop its chatbot ChatGPT – there is likely to be a huge demand in the future. Taiwan Semiconductor, the world’s largest independent semiconductor foundry, supplies at least 43% of Nvidia’s chips, according to financial technology firm Moomoo.
Applied Materials shares are up nearly 35% year-to-date through Aug. 16, while Nvidia is up 151.6%, Taiwan Semiconductor is up 72% and the tech-heavy Nasdaq Composite is up 19.4% over the same period.
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Applied Materials posted upbeat earnings
On August 15, Applied Materials reported fiscal third-quarter results that beat analysts' estimates.
The company reported earnings of $2.12 per share, above estimates of $2.03 per share. Revenue came in at $6.78 billion. The estimate had been $6.68 billion.
For the current quarter, the company sees “strong momentum related to ai and data center computing” and anticipates revenue to reach $6.93 billion, up 3% year over year at the midpoint.
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“The race for ai leadership will be determined by which semiconductor companies are the first to deliver substantial improvements in energy-efficient computing performance,” CEO Gary Dickerson said on the earnings call. “The value of bringing next-generation semiconductor technology to market faster has never been greater.”
In the third fiscal quarter, the company experienced a decline in sales in China, its largest geographic revenue segment. China revenue of $2.2 million, representing 32% of total revenue, was down from $2.8 million and 43% in the previous quarter.
Applied Materials shares fell 1.86% to $207.90 on Aug. 16.
2 analysts raise their AMAT targets
Morgan Stanley raised its price target on Applied Materials to $224 from $223 and maintains an equal weight rating.
The analyst believes the earnings results reflected a solid performance, except for a decline in sales in China. But “the numbers were not affected” due to the strength of foundry and logic, according to the analyst’s research note.
JPMorgan analyst Harlan Sur raised his price target on AMAT from $240 to $250 and maintains an overweight rating, citing “strong July quarter results driven by accelerating demand.” The analyst also believes the company will benefit from upcoming technological advancements.
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Wells Fargo cut its price target for Applied Materials to $260 from $280, but maintained an overweight rating. The analyst was concerned that the outlook for the upcoming October quarter would not meet buyers' expectations.
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