Demand for chips that provide the processing power to train and support artificial intelligence (AI) models is increasing rapidly as governments and technology companies around the globe race to deploy AI applications. This is precisely the reason why Nvidia has witnessed a massive jump in its revenue and earnings in recent quarters.
Nvidia's AI graphics processing units (GPUs) are in such high demand relative to supply that customers are reportedly having to wait anywhere between 36 weeks and 52 weeks to get deliveries of its flagship H100 processors. Not surprisingly, the chipmaker is looking to ramp up the production capacity for those AI chips, which could allow it to sustain its outstanding share price rally.
However, Nvidia's 239% gains over the past year have 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 deliver terrific bottom-line growth, while its 5-year price/earnings-to-growth ratio (PEG ratio) of just 0.7 means that the stock is actually undervalued relative to the growth that it is expected to deliver.
Still, certain investors may want to look for cheaper alternative investments they can buy to profit from the AI boom. I'd point those investors toward Applied Materials (AMAT 2.31%) -- a company that's going to benefit from Nvidia's efforts to increase its AI chip production.
Applied Materials is benefiting from AI-driven semiconductor spending
Applied Materials produces semiconductor manufacturing equipment that allows chipmakers and foundries to fabricate chips and integrated circuits. It gets a nice chunk of its revenue from sales to Samsung, Taiwan Semiconductor Manufacturing, and Intel.
In its fiscal 2023 (which ended Oct. 29, 2023), Samsung and Taiwan Semiconductor Manufacturing, 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 boost spending on semiconductor equipment in 2024, it was not surprising to see Applied Materials' latest results turning out to be better than expected.
Applied Materials released its fiscal 2024 first-quarter results on Feb. 15. For that period, which ended Jan. 28, the company's top line was nearly flat year-over-year at $6.7 billion -- but that was better than the $6.48 billion consensus estimate. Non-GAAP earnings increased 5% year over year to $2.13 per share, easily crushing the $1.91 per share Wall Street estimate.
Management's guidance turned out to be the icing on the cake. Applied Materials expects fiscal Q2 earnings of $1.97 per share at the midpoint of its guidance range, on revenue of $6.5 billion. Analysts were looking for $1.79 per share in earnings on $5.9 billion in revenue. Applied Materials, however, pointed out that "there is a reacceleration of capital investment by cloud companies, fab utilization is increasing across all device types and memory inventory levels are normalizing," which explains why the company's outlook is better than expected.
AI, in particular, is increasing the company's addressable opportunity. For instance, Applied Materials estimates that the demand for high-bandwidth memory (HBM) deployed in AI servers could grow at an annualized rate of 50% in the coming years. The company also points out that the semiconductor die required to manufacture HBM is more than double the size of a standard dynamic random access memory (DRAM) die. So, chipmakers need to increase their capacities substantially to keep up with growing HBM demand.
Meanwhile, the advanced chip packaging process used for manufacturing AI chips is also giving Applied Materials a boost. On the latest earnings conference call, CEO Gary Dickerson said:
In fiscal 2024, we expect our HBM packaging revenues to be four times larger than last year, growing to almost $0.5 billion. And across all device types, we expect revenue from our Advanced Packaging Product portfolio to grow to approximately $1.5 billion.
Applied Materials also points out that the growing deployment of high-performance AI data centers will trigger volume production of gate-all-around (GAA) transistors, which are 30% more efficient than fin-shaped field-effect (FinFET) transistors. The company estimates that its addressable market could expand "by $1 billion for every 100,000 wafer starts per month of [GAA transistor] capacity."
Not surprisingly, Applied Materials' largest customer, Samsung, has been quick to adopt GAA to make advanced chips using the 3nm process node. What's more, the market for GAA transistors is reportedly growing at an annual pace of 39%. This bodes well for Applied Materials as the company claims that it is "on track to gain share and capture over 50% of the spending for the process equipment used in this new transistor module."
An acceleration in growth could send the stock price higher
Applied Materials is expecting $26.1 billion in fiscal 2024 revenue, which would be almost in line with its fiscal 2023 revenue of $26.5 billion. However, the company's first-quarter performance and the guidance for the current one suggest that it could deliver better-than-expected results in an improving spending environment.
It is also worth noting that Applied Materials' earnings increased on a year-over-year basis. Analysts, however, are anticipating that in fiscal 2024, its earnings will drop to $7.73 per share from $8.05 per share last year. Again, the company's fiscal Q1 bottom-line performance and the guidance for the current quarter, which is close to fiscal Q2 2023's adjusted earnings of $2.00 per share at the midpoint, indicate that it could deliver a positive surprise on this front.
More importantly, analysts are forecasting a nice jump in Applied Materials' revenue and earnings for fiscal 2025.
AMAT Revenue Estimates for Current Fiscal Year data by YCharts.
Applied Materials trades at 22 times trailing earnings right now -- a big discount to Nvidia's trailing earnings multiple. Of course, Nvidia is growing at a much faster pace, but conservative investors looking for a cheaper AI stock to buy right 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% following its latest quarterly report, and it looks well positioned to sustain this momentum and go on a bull run.
Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Applied Materials, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short February 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.
