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As I noted in my January 13 video “4 picks for the chip shortage,” investors are looking at shortage of silicon chips that has hit the auto industry especially hard and that argues for a multi-year increase in capital spending to expand chip production at foundry companies such as Taiwan Semiconductor (TSM). As the world’s largest supplier of semiconductor manufacturing equipment, Applied Materials will see its revenue climb as a result of that capital spending. The company’s equipment can be found at almost every major step in cap manufacturing (with the exception of lithography) from chemical and physical vapor deposition to etching to defect-inspection scanning electron microscopes.

The stock is up 60.04% in the last year, as of the close on January 13 with most of that gain coming in the last 3 months where the stock is up 51.9%. The shares are already a pick in my long-term 50 Stocks Portfolio where they’re up 91.8% from December 31, 2017.

Today, I’m adding Applied Materials to my Jubak Picks Portfolio. I think the shares can ride the current increase in equipment spending to my target of $120 from the January 13 close of $98.05.

The chip sector–and even more so the chip equipment sector–is notoriously cyclical. Applied Materials showed revenue of $17.2 billion for the 2020 fiscal year that ended on October 31, 2020. But just $14.6 billion for fiscal 2019 and $14.5 billion for fiscal 2017.

The chip shortage that has led automakers such as Toyota Motor, Volkswagen, and Honda to cut auto production because they can’t get enough chips for their cars argues that we’re about to see a multi-year increase in capital spending as chip makers look to increase capacity to met increased demand.

That increased demand for chips, too, looks to be a multi-year trend. Chips are on track to make up 50% of the manufacturing cost of a car by 2030, up from 35% now. The new 5G smartphones use 40% more chips than older 4G smartphones.

At the chip maker end, that story bodes especially well, as I point out in my video for Taiwan Semiconductor Manufacturing (TSM), Infineon Technologies (IFNNY) and NXP Semiconductors (NXPI). All three of those stocks are members of my online portfolios.

It’s an even better story, in my opinion for the companies, like Applied Materials, that make the equipment that make the chips. The shortages are large enough to produce a significant uptick–and one of some duration–in equipment sales.

For the fiscal fourth quarter that ended on October 31, Applied Materials reported results above the midpoint of the company’s guidance, and raised its projections for fiscal first-quarter revenue. Applied noted that customer demand has remained strong despite the uncertain economic climate stemming from the coronavirus due to capital investments driven chip demand from AI, 5G, and cloud computing. Fourth-quarter sales rose 25% year over year to $4.7 billion, led by a 33% increase in revenue from the semiconductor systems group. Within SSG, equipment sales to logic and foundry customers grew 33% year over year. Memory equipment sales also grew 33% year over year. Management noted its conductor etch business has won new applications in DRAM and foundry-logic with fiscal 2020 etch sales up 30% year-over-year.

One of the long-term competitive advantages that comes from being the biggest in a sector is cash flow that a company can, if it’s smart, invest into research and development of new products. (This is one reason that the stock is in my long-term 50 Stocks Portfolio.) Applied Materials’ research and development budget runs in excess of $2 billion an goes to fund such cutting-edge technologies as 3D chip architectures and new tools in chemical disposition and removal.

Over the last decade Applied Materials has also become a leading supplier of manufacturing equipment for flat-panel displays including OLED (light-emitting diode) panels.