Shares of Applied Materials Inc., the semiconductor industry equipment manufacturer, traded higher today after the company reported fiscal first-quarter earnings and revenue that came in well ahead of analysts’ expectations.

The company reported earnings before certain costs such as stock compensation of $2.13 per share, easily beating Wall Street’s consensus estimate of $1.90 per share. Revenue for the period clocked in at $6.71 billion, flat from the year ago period but ahead of the $6.48 billion analyst target. All told, the company’s net profit topped $2.01 billion, up 18% from the $1.71 billion profit it reported a year ago.

Applied Materials’ stock gained more than 12% in the extended trading session on the back of the report, adding to a slight gain made during the regular session.

Chief Executive Gary Dickerson (pictured) said the company has outperformed the wider semiconductor market for five consecutive years. “Our leadership positions at key semiconductor inflections support continued outperformance as customers ramp next-generation chip technologies critical to AI and IoT over the next several years,” he added.

The company is a supplier of complex chipmaking equipment that’s used at the facilities of chipmakers such as Intel Corp., Samsung Electronics Co. Ltd. and Taiwan Semiconductor Manufacturing Co. It’s this status that positions the company as a key indicator of future demand in the chipmaking industry.

Its customers generally order machinery from it well in advance of the opening of new chipmaking factories and upgrades to existing lines, which can take more than a year to outfit for production. Both Intel and TSMC are constructing enormous new plants in the U.S. in the expectation that demand for domestic chip production there will increase.

“Overall market dynamics are improving,” Dickerson said on a conference call with analysts. He added that customers’ factories are now operating at close to full capacity.

The semiconductor industry has been boosted by demand for artificial intelligence chips, as well as a slight recovery in the personal computer market, the company added. In addition, there is also a rush to build AI-embedded PCs that are fitted with more powerful chips.

Dickerson added that the company is also seeing more demand for capacity for chips for internet-connected appliances, as well as communications and the automotive industry. It’s an area Applied Materials refers to as ICAPS. Demand for these chips is rising because more devices require connectivity and the computing ability to sense the world around them, the CEO said.

According to Dickerson, the ICAPS market may not continue at its current growth rate, but the market will continue to be fueled by the need for more chips per device. “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 market peers such as the Dutch chipmaking specialist ASML Holding NV, Applied Materials has been hit by restrictions on what it can and can’t ship to China. The U.S. government has pressured chipmaking equipment manufacturers to stop supply China with the most advanced technology they build, citing national security concerns.

Yet China has a rapidly growing domestic chipmaking industry, which is mostly focused on less advanced semiconductors, and this market has become a source of rapid growth for Applied Materials. The company said revenue from China doubled from a year earlier, accounting for 45% of its total sales.

But there could be trouble ahead for Applied Materials. In November, Reuters reported that the company is the subject of an investigation by the U.S. Justice Department regarding its dealings with China’s biggest semiconductor maker, Semiconductor Manufacturing International Corp.

According to Reuters, it’s alleged that the company shipped a huge volume of equipment to SMIC without the appropriate export licenses it needed to do so legally. The shipments were said to be worth “hundreds of millions of dollars.” The company’s management insisted that the shipments were previously disclosed and that it’s cooperating with the DOJ’s investigation.

Analyst Holger Mueller of Constellation Research Inc. said it will be vital for Applied Materials to keep up its growth in China. There is a lot to like in its latest results, he said, and the company is doing better than many of its peers in the semiconductor industry, but there are also some concerns that must be addressed, he believes.

“Dickerson and his team showed good cost discipline to increase profitability, but under the hood the company is going through a roller-coaster ride, and its foundry business would have been ugly if it didn’t manage to triple its DRAM revenue,” the analyst said. “Even more dramatic was the revenue growth in China. That country now accounts for 45% of its overall sales, compared to just 17% one year ago. All other geographies are down, with the exception of Japan, so it’s important for the company to protect and grow its China business.”

Applied Materials is optimistic about its near-term prospects, at least. The company said today it’s looking for fiscal second-quarter revenue of around $6.5 billion at the midpoint of its forecast, which is well ahead of Wall Street’s projection of $5.92 billion in sales.

In addition, the company sees profit per share of between $1.79 and $2.15, above the Street’s call for $1.79 per share.

Applied Materials’ stock has gained 57% in the past 12 months prior to today’s stock jump, compared to a 45% gain in the iShares Semiconductor exchange-traded fund.

Photo: Berkeley Engineering/YouTube