Nvidia's $3 trillion market cap has prompted questions about its room for growth. But its semiconductor supplier, Applied Materials, with a market cap of $170 billion, probably has more potential.
Applied Materials (AMAT) mainly produces the complex machinery used to make chips. The company has three segments: Semiconductor Systems, Applied Global Services, and Display and Adjacent Markets.
The semiconductor segment is the company's core business, generating $19.7 billion in net sales for fiscal 2023, which accounts 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’ largest customers include Taiwan Semiconductor (TSM) , Samsung (SSNLF) , and Intel (INTC) . In fiscal 2023, Taiwan Semiconductor represented 19% of the company’s net sales, and Samsung contributed 15%. Intel accounted for less than 10%.
Related: Big names exit Nvidia stock as AI giant stumbles before earnings
Semiconductors play a crucial role in the AI wave. OpenAI needs tens of thousands of Nvidia (NVDA) chips to develop its ChatGPT chatbot - likely a huge demand ahead. Taiwan Semiconductor, the world’s largest independent semiconductor foundry, supplies at least 43% of Nvidia’s chips, according to fintech firm Moomoo.
Applied Materials shares have risen nearly 35% year to date as of August 16, while Nvidia has surged 151.6%, Taiwan Semiconductor added 72%, and the tech-heavy Nasdaq Composite added 19.4% during the same period.
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Applied Materials posted upbeat earnings
On August 15, Applied Materials posted its fiscal Q3 results that beat analysts’ estimates.
The company reported earnings of $2.12 per share, ahead of the $2.03 a share estimate. Revenue hit $6.78 billion. The estimate had been $6.68 billion.
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For the current quarter, the company sees a “strong pull related to AI and data center computing” and anticipates its revenue will hit $6.93 billion, up 3% year-over-year at the midpoint.
“The race for AI leadership will be determined by which companies in the semiconductor industry are first to deliver substantial improvements in energy-efficient compute performance,” said CEO Gary Dickerson in the earnings call. “The value of bringing next-generation semiconductor technology to market faster has never been greater.”
In the fiscal third quarter, the company saw a sales decline in China, its largest geographical revenue segment. China revenue of $2.2 million, representing 32% of total revenue, was off from $2.8 million and 43% in the previous quarter.
Applied Materials stock fell 1.86% to $207.90 on Aug. 16..
2 analysts boost their AMAT targets
Morgan Stanley raised their price target on Applied Materials to $224 from $223 and keeps an equal weight rating.
The analyst believes that the earnings results reflected strong performance except for a decline in China sales. But “numbers were unphased” because of strength in foundry and logic, according to the analyst's research note.
JPMorgan analyst Harlan Sur raised the AMAT price target to $250 from $240 and keeps an overweight rating, citing “solid July quarter results driven by accelerating demand.” The analyst also thinks the company will benefit from upcoming technology advancements.
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Wells Fargo lowered its price target for Applied Materials from $280 to $260 but maintained an overweight rating. The analyst was concerned that the guidance for the upcoming October quarter slightly fell short of buy-side expectations.
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