This growth action could take off this earnings season

Semiconductor equipment supplier Applied materials (NASDAQ: AMAT) is my best choice for growth for 2021. That’s because the company has put itself in an excellent position to take advantage of a surge in demand for chips used in smartphones, automobiles, artificial intelligence, Internet of things, and more.

These favorable winds have helped Applied Materials stock get off to a good start in the new year, and it could shift into high gear once the company releases its first quarter fiscal 2021 results on Thursday.

Let’s take a look at what is expected of Applied Materials and why the stock could perform well after its next quarterly earnings report.

AMAT given by YCharts

His hot streak should continue

Applied Materials has witnessed strong demand for its semiconductor manufacturing equipment and related services. These favorable winds helped the company to close fiscal 2020 up, with turnover up 18% over the year.

The company plans to start fiscal 2021 on a more solid footing, with revenue expected to jump 19% year-over-year to $ 4.95 billion in the first quarter. Applied Materials expects adjusted earnings to reach $ 1.26 per share in the middle of its forecast range – a good jump from earnings of $ 0.98 per share for the prior year period.

However, Applied Materials could exceed its own expectations as it is growing faster than the wider market. According to SEMI, an industry association, spending on foundry equipment jumped 12% in 2020 to $ 23.2 billion. Applied Materials ended 2020 with foundry revenue of $ 6.7 billion, up 42% from $ 4.7 billion in 2019.

A similar scenario has unfolded in the memory sector. SEMI predicts that dynamic random access memory (DRAM) spending to jump 4% in 2020. Applied Materials generated $ 2.28 billion in revenue from the DRAM equipment business, up 15% from the previous year.

Hand drawing stock market graph back.

Image source: Getty Images.

The good news is that DRAM equipment spending is expected to jump 39% in 2021, driven by demand for 5G smartphones, graphics cards and personal computers. The strong demand for DRAM is already causing a tight supply memory chips, which may cause memory manufacturers to increase production.

In addition, there is a major shortage of chips globally, resulting in lost sales for automakers, game console manufacturers and PC component manufacturers (personal computers). Semiconductor equipment suppliers such as Applied Materials can take advantage of this opportunity, as manufacturers will be forced to invest in new equipment or upgrade existing machines to increase capacity.

Great advice could be in the cards

Applied Materials should operate on gas given these favorable conditions on the end market. The consensus estimates Applied Materials revenue growth in the fiscal second quarter year-over-year is 24% to $ 4.91 billion. Earnings are expected to drop from $ 0.89 per share in the second quarter of fiscal 2020 to $ 1.26 per share in the current quarter.

Thus, Applied Materials will have an ambitious policy objective to achieve when it publishes its results. But investors shouldn’t forget that the company ended the fourth quarter of fiscal 2020 with a record the order book valued at $ 6.7 billion. At the same time, it’s worth noting that overall spending on semiconductor manufacturing equipment is expected to increase 13% in 2021 according to SEMI, more than the estimated 8% increase last year.

As such, Applied Materials can maintain its high growth levels for the remainder of 2021. This could add to the impressive rise the stock has already delivered and make it more expensive to buy. That is why now would be the right time for investors to purchase this growth stocksbecause it is still trading at a reasonable level of 27 times rolling profits and 21 times future profits.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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