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Top Picks Mid-Year Updates- Applied Materials

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Applied Materials (AMAT) — which has risen 56% so far this year — delivered fiscal 2Q21 revenue and adjusted EPS that were well ahead of consensus expectations, explains Jim Kelleher, an analyst with Argus Research.

Both sales and EPS rose in the double digits as AMAT’s semiconductor solutions business continued to grow faster than the overall semiconductor industry.

See also: Top Picks Mid-Year Updates: Alphabet

AMAT is seeing broad-based strength across its semiconductor operations. Amid accelerating growth, driven by secular transitions such as cloud and AI, and given the cyclical driver of the semiconductor shortage, CEO Gary Dickerson expressed confidence that AMAT would outperform its markets.

Applied Materials had an eventful quarter in which it introduced new products. These include the AIx platform, or Actionable Insight Accelerator, which provides engineers with real-time visibility into chip processes; and the Enlight Optical Wafer inspection system, an AI-enabled optics solution that efficiently captures yield data for each wafer.

In mid-March, AMAT announced a 9% hike in its quarterly dividend to $0.24 per share, or $0.96 annually. The current yield is about 0.7%.

On a stand-alone basis, AMAT is the revenue and market share leader in the semiconductor capital equipment space. As the global economy recovers from the pandemic, the digital transformation of companies, industries, and global economies should continue to drive WFE equipment demand.

Applied also expects demand for display fabrication equipment to recover, fueled by OLED and large-screen TVs. With a record number of machines to maintain, AMAT’s global services business is also growing rapidly.

Going forward, AMAT’s confidence in future outperformance is based on the company’s positioning in key niches of the WFE market. These include CMP, epi, thermal, and implant, all expected to grow 50% or more in 2021.

With Moore’s Law and 2D scaling being overtaken by technology advances, the industry has transitioned to a new playbook to drive power, performance, area cost, and time-to-market (PPACt). AMAT created its ICAPS business to focus on serving IoT, communications, automotive, power, and sensors — all areas vital to the PPACt playbook.

See also: Top Picks Mid-Year Updates: Patrick Industries

AMAT brings key strengths to the PPACt transition, including a broad portfolio of technologies; the ability to combine and adapt its portfolio to meet customer needs; and a proprietary suite of solutions that facilitates faster time-to-market.

Applied Materials offered a well-above-consensus outlook for 3Q21 that signals a third consecutive $5 billion-plus revenue quarter, and potentially its first $6 billion quarter. AMAT appears attractive on prospects for long-term top-line growth and margin expansion, as well as on valuation. We are reiterating our “buy” rating and our 12-month target price of $155.

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