The Boon of Artificial Intelligence on Chip Demand

The growing trend of artificial intelligence (AI) is set to significantly increase the demand for chip processors and related inference software. This, in turn, is expected to benefit the semiconductor equipment industry.

Investing in Applied Materials

Redburn Atlantic analyst Timm Schulze-Melander presents an intriguing theory that supports investing in Applied Materials. He suggests that those who are enthusiastic about ChatGPT, an AI language model, should consider buying shares of Applied Materials.

Rising Ratings and Coverage

In light of this theory, Schulze-Melander has raised his ratings on both Applied Materials (ticker: AMAT) and ASM International (ASMIY) to Buy from Neutral. Additionally, he has initiated coverage of Lam Research (LRCX) with a Buy rating and started KLA (KLAC) at Neutral.

Short-Term Challenges, Long-Term Growth

While chip makers are currently reducing their capacity, which usually poses challenges for the equipment sector, Schulze-Melander foresees growth resuming in the semiconductor capital equipment industry in 2025. This growth is expected to be driven by the increased demand for chips due to the accelerated deployment of AI applications.

Navigating 2024

Schulze-Melander predicts that the chip sector will experience further reductions in consensus estimates when it reports earnings early in 2024. However, he believes that investors will look beyond the challenges faced in 2024 and focus on the growth opportunities presented in 2025 and beyond.

Positive Factors Emerging

Despite the complexities surrounding the industry, Schulze-Melander identifies multiple positive factors that are aligning. He observes that the PC end market has reached its lowest point and anticipates a rebound with an estimated 8% growth in 2024 after an 11% decline this year.

Moreover, there are positive indicators of recovering demand in the mobile phone market, particularly in China. These “green shoots” suggest a potential upswing in demand.

In conclusion, the artificial intelligence trend is expected to have a significant impact on chip demand. This, in turn, should benefit the semiconductor equipment industry. Investors should consider the potential growth opportunities in 2025 and beyond, despite the short-term challenges faced in 2024. Applied Materials, along with other companies in the sector, presents an appealing investment choice.

China’s Smartphone Market Stabilizes

The world’s largest smartphone market, China, has shown signs of stability, with local brands experiencing higher-than-expected sales. Suppliers are witnessing a surge in demand for local handsets.

Potential Catalyst: Samsung’s Galaxy S24 Launch

In January, Samsung is expected to launch the Galaxy S24 smartphone, which could serve as a potential catalyst for the mobile phone segment. Analysts project a 4% increase in global smartphone unit shipments next year, following a 5% decline this year.

Data Center Chip Market Weakens

The data center chip market has been experiencing weakness, but there are early indications of an emerging investment cycle. However, chips used in the automotive and internet of things sectors are currently witnessing a slowdown in demand.

Focus on Applied Materials

With a price target of $175, Applied Materials offers the broadest range of technology offerings in semiconductor manufacturing.

ASM International’s Market-Leading Position

Schulze-Melander sets a price target of €545 for ASM International, citing the company’s market-leading position in atomic layer deposition. This area is expected to be driven by new applications.

Lam Research Benefiting from Vertical Scaling

Lam Research holds powerful market positions in two key etch processes – conductor and dielectric. With a price target of $800, Lam Research is anticipated to benefit from the chip industry’s increased adoption of “vertical scaling.”

Stable Growth Trajectory for KLA

KLA is projected to maintain a stable growth trajectory. While Schulze-Melander sets a price target of $550 for KLA, he believes that the business is well understood by investors.

All mentioned companies – Applied Materials, KLA, Lam Research, and ASM International – observed an increase in their stock prices on Wednesday.