Sopko: AMAT Future "Bright" as Earnings, Partnerships Signal AI Demand

Nicole Pedolides (0:00)

Welcome back to The Watch List. I'm Nicole Pedolides. It's time now to break down the very latest on the earnings report of Applied Materials. Stephen Sopko's with me, practice lead semiconductor, deep tech, hyperframe research. And I'm so glad that you're with us. I will say that most of the analysts seem pretty positive on the fourth quarter and the outlook, and the gross margins expanding for the fourth quarter, 14th consecutive quarter. There seemed to be a lot of bright spots. Some expressed some apprehension. What say you about it?

Stephen Sopko (0:32)

Well, I think I'm one of those analysts who sees a lot of bright spots. I think if we're looking for where the company is paying a lot of attention right now, it is really expanding its headcount. It's hiring engineers, it's hiring technical support people because of the demand. I think that's in two dimensions. One, the demand for additional product from them is off the charts. They expect demand to double next year, that sort of thing. But I think the other key is, their support for their existing machines is still in extremely high demand. It's a very sticky benefit that their customers are pulling from them.

One of the things I've learned in the last few weeks is they're using this data, they get back from the thousands of existing machines they have in the field, I think something like 37,000 machines to inform how they're going to build machines in the future. It's one of those places where you see companies using AI to fundamentally change what they're doing. So I think those are things, they see challenges ahead partially because of needing to grow. But also I think something that isn't within their control, it's how fast clean room space comes online. Any delays in production or construction for these chip fabs is going to have a direct impact on them. So that's the other thing I think a lot of us are watching.

Nicole Pedolides (1:52)

Yeah, and I think about, I want to go into a little bit more about the Outlook for 2027 because as you noted, we had a beat and raise quarter. These quarter was strong equipment sales, services, revenue and other were all above consensus. So and the guidance was well above when it came to equipment and slightly above for the services and others. But the question too becomes the wafer fab equipment, and how much of it is priced in? Because we know that the market growth is there, they are capable of getting that, but how much of it is already priced in here? I mean, is that something that you're watching really closely?

Stephen Sopko (2:32)

It is. I think the market looks at these companies, whether it's Applied or Land Research or ASML, and they see this just very steady demand signal. I think to your point, a lot of that is priced in, the demand isn't going anywhere. So then it becomes, okay, what could slow demand?

That's the factors beyond their control and construction. But also, what are technological advances that are necessary to meet the next demand? Remember, everything that's being built right now, every Vero Rubin system out of NVIDIA was largely designed before agentic AI really became the thing that it is now. So these companies have to think three or four process nodes ahead, which is eight to ten years ahead, and try to anticipate what the technology is going to be demanding, so the fabs know what machines to buy to meet that demand, and companies like Applied know what they're going to need in terms of material and scientific advances to meet those needs. They're moving atoms around in these machines to build today's processors. So I think that's a big part of when we look at companies like this, that is a real indicator of where they think the technology is going to go.

Nicole Pedolides (3:49)

There is some concern too, the limited upside to fiscal 2027 due to the clean room constraints. Could you explain that to us? And do you agree?

Stephen Sopko (3:58)

I think we're all, I do.

I think we're all looking at clean room constraints. When you think about the labor force necessary to not only operate clean rooms, where the machines are going to be installed, where the fabs are going to be making chips, but you think about the skilled labor needed to build those fabs, build the clean rooms, all of that is in demand across a number of different technological sectors. We've got, of course, the data center demand for construction. You've got chip fabs which are incredibly difficult to build. And then you've got things like space, which is another area that I'm interested in, where all of these growth areas in the economy are in many ways pulling from the same labor pools, pulling from the same construction companies. So we're watching very carefully where does, I mean, we're all focused on things like permitting and that sort of thing in data centers, but it comes down to components and machines that you need in order to do air handling and cooling of these, all of these different types of buildings. So I do think that is when I look at any possible constraints for 27, that's where they come from. But right now, nobody's signaling that way. I mean, the thing to watch really for me is TSMC. Obviously, that's the key.