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Applied Materials' Earnings Spark Fresh Gains for Chip Equipment Stocks

Along with posting strong results and guidance, Applied offered upbeat commentary about expected 2021 chip equipment demand.
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Several chip equipment stocks are close to their 52-week highs after Applied Materials  (AMAT) - Get Applied Materials, Inc. Report became the latest industry player to post a strong earnings report this fall.

Applied, one of the world’s biggest chip equipment makers, easily beat October quarter estimates while reporting 25% total revenue growth and 33% growth for its Semiconductor Systems (chip equipment) segment. The company also issued January quarter guidance that implies 19% revenue growth and 29% EPS growth at its midpoints.

Applied is up 3.2% to $72.03 in afternoon trade Friday. Several other chip equipment makers, including Lam Research  (LRCX) - Get Lam Research Corporation Report, Ultra Clean Holdings  (UCTT) - Get Ultra Clean Holdings, Inc. Report and Axcelis Technologies  (ACLS) - Get Axcelis Technologies, Inc. Report are up over 2%.

Brooks Automation  (BRKS) - Get Brooks Automation, Inc. Report -- a chip equipment maker that also sells equipment used by drug developers -- is up 3%, adding to big Wednesday gains seen in response to a strong September quarter report.

Applied and Lam are both within 5% of their 52-week highs, as are several other chip equipment firms, such as ASML  (ASML) - Get ASML Holding NV Report, KLA  (KLAC) - Get KLA Corporation Report, Teradyne  (TER) - Get Teradyne, Inc. Report and MKS Instruments  (MKSI) - Get MKS Instruments, Inc. Report.

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Along with its results and guidance, investors might be taking heart in Applied’s earnings call commentary about its 2021 expectations for key chip equipment end-markets.

On the call, CEO Gary Dickerson said his firm is confident that current investment levels among foundry/logic chip manufacturers -- the biggest of which are TSMC  (TSM) - Get Taiwan Semiconductor Manufacturing Co. Ltd. Report, Intel  (INTC) - Get Intel Corporation Report and Samsung -- “are sustainable into 2021 and beyond,” as clients continue investing heavily in supporting cutting-edge manufacturing processes.

Foundry/logic capex has been elevated this year, thanks in part to aggressive spending by foundry giant TSMC as it tries to meet the high demand it’s seeing for wafers made using its advanced 7nm and 5nm manufacturing processes.

In addition, Dickerston suggested DRAM capital spending will be strong next year, and that spending related to specialty chip manufacturing processes could pick up in 2021, after being depressed in 2020 as automotive and industrial chip manufacturers dealt with COVID-related sales pressures. Applied sees capex among NAND flash memory makers being roughly flat, following strong 2020 growth.

Along with solid earnings reports, the relative strength shown by many low-multiple stocks this weeks could be a tailwind for chip equipment makers, given that (in part due to concerns about the industry’s historical cyclicality) many of them still carry moderate forward P/Es.

Despite its recent gains, Applied currently trades for less than 15 times the EPS consensus for its 2021 fiscal year. Lam and KLA both trade for 19 times its fiscal 2021 EPS consensus, and Teradyne trades for 21 times its 2021 EPS consensus.