Newly spun off Qnity proves it's an AI force that investors should not ignore

CNBC Finance

5 min read

Qnity Electronics on Thursday reported strong fourth-quarter results alongside rosy guidance, solidifying its reputation has an under-the-radar beneficiary of the artificial intelligence boom. Revenue in the fourth quarter increased 8% from a year ago to $1.19 billion, outpacing the $1.16 billion expected by LSEG. Earnings per share (EPS) fell 5.7% year over year to 82 cents, but outpaced the consensus estimate of 64 cents, according to LSEG. Q 1Y mountain Qnity 1-year return Bottom line Qnity's first earnings report as a public company showed why we were so excited to have it in the portfolio upon being spun off from DuPont in the fall. This is a company that fills an essential role in the artificial intelligence boom: It provides chemicals and other materials used to manufacture semiconductors and package them in increasingly complex ways. For example, Qnity supplies the chemicals, known as photoresists, that enable chip circuit designs to be "printed" onto the piece of silicon wafers that become semiconductors. It also sells chemicals for managing the heat that electronics throw off to ensure they keep running efficiently. Leading chip manufacturers TSMC, Samsung, and SK Hynix are Qnity customers. The reason to like Qnity is that it is a winner from growing AI compute demand, no matter where it comes from. Whether that is orders for Nvidia's cutting-edge graphics processing units (GPUs), custom chips from the likes of Alphabet with its Tensor Processing Units (TPUs), and the severe shortage of memory chips, Qnity stands to benefit. It is the classic "picks and shovels" play, and the gold rush is AI. Against that backdrop, it's easy to understand why Qnity delivered better-than-expected results for the quarter with a strong guide. The demand for compute is seemingly insatiable. Plus, as the manufacturing processes gets more advanced, the amount of Qnity materials needed per chip goes up compared to older processes. Better yet, Qnity added another exciting layer to the investment story focused on internal improvements. That means we don't need to rely simply on industrywide dynamics to grow profits. The company is working on cleaning up its own house, too. On Thursday, executives detailed a multiyear transformation plan intended to simplify operations, enhance productivity, and cut costs. The plan is expected to result in a $100 million boost to its EBITDA run rate by the end of 2028. There's no free lunch to achieve this, though, with management acknowledging Qnity will incur about $140 million in largely one-time costs over the next two to three years. Most will come this year and next. Given that its full-year earnings guidance exceeded estimates, investors will likely be more than happy to look through these charges because it will result in a more profitable company going forward. Among the plan's pillars, we liked that management talked about using automation and tailored AI applications. Additionally, strengthening its local-for-local operating model, which prioritizes building operations close to its end customers, is smart in a world full of trade tensions. By afternoon trading, the stock has given back most of its early morning rally. But we'll chalk that up to the broader sell-off across the data center hardware complex on Thursday rather than any hidden blemishes in Qnity's results. We're itching to upgrade Qnity to our buy-equivalent 1 rating, but we're holding off for now in case this rotation out of year-to-date AI hardware winners proves more durable. We're upping our price target to $140 a share from $110, reflecting the strong report and Qnity's critical place in the AI supply chain. Quarterly results Qnity's two operating segments â Semiconductor Technologies and Interconnect Solutions â delivered better-than-expected sales. Both segments' adjusted EBITDA margins were light versus consensus, but we're not reading too much into it because it's such a new company. Plus, they're investing in growth, which is money well spent right now. The Semiconductor Technologies segment is home to its products used directly in the complex process of making a semiconductor. It also covers the materials that go into certain TV screens and other electronic displays. The products sold by the Interconnect Solutions segment, on the other hand, are more involved in advanced packaging and thermal management. The complexity of AI chips is driving demand for both processes. And, as the name suggests, this segment is also involved in manufacturing the "interconnect" products that connect the various parts of the data center. AI also is boosting demand there. Guidance Management's targets for the full year 2026: Sales of $4.97 billion to $5.17 billion, beating the $5.06 billion consensus estimate at the midpoint, according to LSEG, at the midpoint. Adjusted operating EBITDA of $1.465 billion to $1.575 billion, slightly below the consensus estimate of $1.535 billion at the midpoint, FactSet shows. Adjusted earnings of $3.55 to $3.95 per share, ahead of the $3.14 billion consensus estimate, according to LSEG. Adjusted free cash flow of $450 million to $550 million, below the $602 consensus estimate, according to FactSet. (Jim Cramer's Charitable Trust is long Q. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

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Newly spun off Qnity proves it's an AI force that investors should not ignore

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