Applied Materials Jumps After Forecast Shows Chip Rebound

(Bloomberg) — Applied Materials Inc., the largest US maker of chipmaking machinery, jumped in late trading after giving a bullish revenue forecast for the current period, signaling that some of the largest semiconductor companies are increasing their investments in new production.

Fiscal second-quarter sales will be about $6.5 billion, the company said in a statement Thursday. That compares with an average analyst estimate of $6.32 billion. Excluding some items, profit will be $1.79 to $2.15 a share in the period, which ends in April. The average projection was at the low end of that range.

The outlook suggests that the chip industry is bouncing back more quickly than expected. Applied Materials supplies gear to all of the sector’s major manufacturers — a list that includes Samsung Electronics Co., Taiwan Semiconductor Manufacturing Co. and Intel Corp. That makes the company’s projections an indicator of confidence in future demand at these key parts of the electronics supply chain.

The shares gained more than 11% in late trading. They had closed at $187.66 in New York on Thursday, leaving the stock up 16% for the year.

Applied Materials Sees Surge in Chinese Sales | The market accounted for nearly half its revenue last quarter

Excluding some items, Applied Materials posted earnings of $2.13 in the fiscal first quarter. Sales slipped less than 1% to $6.71 billion. That compares with estimates of $1.91 a share and revenue of $6.48 billion.

China was a particular bright spot, with sales there more than doubling to $3 billion. They accounted for 45% of the company’s total.

The surge was caused by a rush to build capacity for internet-connected appliances, communications and the auto industry, as well as power and sensors, Chief Executive Officer Gary Dickerson said in a telephone interview. It’s an area Applied Materials refers to as ICAPS.

Demand for such chips is growing because more devices are acquiring connectivity, computing capacity and the ability to sense the world around them, he said. While that sector may not continue at its current rate of growth, the need for more chips per device will keep fueling the market, meaning the current buildup isn’t a bubble.

“That market will surprise people,” he said. “There are thousands of chips in an electric vehicle. There are numerous devices on the edge where you’re going to see content growth.”

Like its peers, Applied Materials is facing tougher restrictions on what it can ship to China. Washington has sought to prevent cutting-edge chip manufacturing equipment from reaching the country, seeing it as a threat to national security.

At the same time, the Asian nation has a burgeoning chip industry — most of which is focused on less advanced semiconductors — and has become a huge source of growth for Applied Materials and others. Chinese chipmakers are building up their production capacity for older types of chips made with equipment that doesn’t violate US and European rules.

Companies such as ASML Holding NV and Tokyo Electron Ltd. also have seen Chinese sales grow. But the situation remains a source of concern for investors. In November, Applied Materials shares tumbled on a report that the Justice Department was investigating the company over dealings with China’s biggest chipmaker, Semiconductor Manufacturing International Corp. Applied has said that the investigation had been previously disclosed and that it is cooperating.

Semiconductor manufacturers order machinery from Applied Materials and its peers well ahead of opening new factories, which can take more than a year to build and equip. Chipmakers like Intel and TSMC are constructing new plants in the hopes that future demand will grow — especially in areas like industrial and automotive chips.

“Overall market dynamics are improving,” Dickerson said on a conference call with analysts. He said factories are operating at closer to full capacity, adding incentives to spend on new production.

(Updates with CEO comments starting in sixth paragraph.)

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