Buying More of This Semi-Cap Play on Tightening Industry Capacity
Tight capacity levels bode well for orders and favorable pricing, bringing nice operating leverage.
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| Symbol | Transaction Type | # Shares Traded | Recent Price $ | Shares Owned After Trade | % Portfolio |
|---|---|---|---|---|---|
| AMAT | Buy | 56 | 435.81 | 451 | 3.1 |
After you receive this alert, the Pro Portfolio will buy 56 shares of Applied Materials (AMAT) at or near $436. Following the trade, we will own 451 AMAT shares, accounting for roughly 3.15% of the Pro Portfolio’s assets.
The catalyst behind our decision to load up on more AMAT are comments made by Taiwan Semiconductor (TSM) at semi-cap industry event, Semiconductor Taiwan. As background, the event is similar to Semicon West, the one at which AMAT is not only a sponsor but tends to give a briefing as well. This year, Semicon West will be held October 13-15.
During Taiwan Semi COO Cliff Hou’s fireside chat at Semicon Taiwan, he shared the company has nearly doubled its projected requirements for semiconductor production equipment since the end of last year. Hou called out the strength in the foundry business as it looks to address surging demand from the AI sector, and admitted that TSM cannot meet all demand from all customers, though it is trying to catch up.
That led TSM to increase its own estimate of quarterly equipment purchases to about 1.9 times the amount it projected in December. However, with customers such as Nvidia (NVDA) and Advanced Micro Devices (AMD) constantly increasing orders, the ability for TSM to close the gap between supply and demand is significant.
As we think about that demand backdrop, let’s consider the following:
Nvidia expects to grow its chip sales by 70% next year and still be capacity constrained.
After reporting $16.7 billion in custom silicon revenue for its July quarter last night and sharing orders received in that quarter topped $30 billion, Broadcom (AVGO) CEO Hock Tan noted expectations for AI chip revenue next year to be $115 billion, up from a prior forecast of over $100 billion, and set expectations for $230 billion the year after.
In late August, Marvell (MRVL) said it now sees its data center business growing 60% this year, up from its prior forecast of 50%, with that business up by more than 60% next year. As a reminder, we’ll get more details on this ramp when Marvell hosts an Investor Day on October 6.
To those forecasts from three chip holdings, we can add others that count TSM as a manufacturing partner, including AMD and Qualcomm, and their chip projections.
At the same time, let’s remember that as chip companies are looking to meet AI and data center demand, they are doing so at the expense of other demand pockets, like PCs and smartphones.
Putting all this together tells us chip industry capacity is going to remain tight for some time, and that reinforces our view that AMAT will have pricing power. Rising orders and pricing power bode well for fixed-cost absorption and margin expansion.
That is what is leading us to pick up additional shares of AMAT, and we’re doing so before the management team presents at the Citi Technology Conference on September 8, and the Goldman Sachs Communacopia & Technology Conference on September 9.
As we make this move, we will reiterate our One rating, and reset our checkpoint to $390. Once we’ve digest AMAT’s conference comments, we’ll revisit our price target as needed.
More Pro Portfolio:
- We’re Accumulating More Shares of This Oversold Holding
- We’re Tracking 23 New Signals Across Our Investing Themes
- August Monthly Roundup: Maintaining Our Lead Through the Ups and Downs
(Please note that we are looking to execute these trades at or near the share price mentioned above. Once the trade is completed, subscribers can see the trade’s executed price here. Be sure to toggle the chart to sort by Purchase Date.)
At the time of publication, TheStreet Pro Portfolio was long AMAT, AVGO, MRVL, and NVDA.
