The current global shortage of semiconductor chips has been big news for the markets, and while chip supply may catch up in the second half of the year, demand for semiconductors looks set to accelerate further. An inflection in Artificial Intelligence (AI) is driving a new era of innovation and secular market growth, according to Applied Materials, which reported strong first quarter earnings yesterday.
Applied Materials [NYSE:AMAT] reported a continued acceleration of demand in its semiconductor business, with first quarter sales of US$5.16 billion (+24% YoY) and adjusted EPS of US$1.39 (+42%). Sales beat market consensus by 5% and adjusted earnings beat by 40%. On outlook, the company expects, at the mid-point of its Q2 guidance for semiconductor system revenues to be up around 50% YoY.
The semiconductor industry began a fundamental shift in demand following the emergence of smart phones. This has led to the Internet of Things (IOT) that is now moving from All Things Connected to All Things Intelligent and, at a macro level, the digital transformation of companies and the economy at large looks set to accelerate.
This digital transformation is empowering a data explosion. Data is now doubling every two years. Yet only 2% of data is currently processed and 80% of data is unstructured. This is leading to the transition from an application-centric world – where people generate most of the data – to a data-centric world – where almost all the data growth comes from machines.
We are still in the early stages of these trends, with the IOT and smarter vehicles set to drive a 10-fold increase in data generation over the next 4 to 5 years, according to Applied Materials.
Turning data into insight through AI is very computer intensive and new computing architecture innovation is needed for higher bandwidth and energy efficiency. This will require rapid, dramatic improvements in chip power efficiency, performance, area, cost, and time to market. Applied Materials reports that it has a strong pipeline of new products and technologies that it has been developing over the past several years.
Another factor driving semiconductor volumes is the slowing of Moore’s Law (the doubling of computing power every two years) from scaling. This has started to result in diminishing returns for processing power but means that the world is going to need more wafer starts to keep up with any particular level of bit demand growth. This can only be done through building more factories and adding more capacity.
Headquartered in California’s Silicon Valley, Applied Materials is a leader in materials engineering solutions in the semi-conductor industry and is used to produce virtually every new chip and advanced display in the world. Three of the past four years have been record years for equipment investment and Applied Materials believes that 2021 is shaping up to be another record year.