Newly spun off Qnity proves it’s an AI force that investors should not ignore
Qnity Electronics on Thursday reported strong fourth-quarter results along with positive guidance, cementing its reputation as an under-the-radar beneficiary of the AI boom. Revenue in the fourth quarter rose 8% year over year to $1.19 billion, beating the $1.16 billion LSEG had expected. Earnings per share (EPS) fell 5.7% year over year to 82 cents, according to LSEG, but beat the consensus estimate of 64 cents. Quarter 1H 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 added to our portfolio after being spun off from DuPont in the fall. This is a company playing a key role in the AI boom: It supplies the chemicals and other materials used to manufacture semiconductors and packages them in increasingly complex ways. Qnity, for example, provides chemicals known as photoresists that enable chip circuit designs to be “printed” onto a piece of silicon wafer that becomes a semiconductor. It also sells chemicals to manage the heat emitted by electronic devices to ensure they continue to operate efficiently. Leading chip manufacturers TSMC, Samsung and SK Hynix are customers of Qnity. The reason to like Qnity is that it is a winner from the growing demand for AI computing, wherever it comes from. Whether it’s Nvidia’s cutting-edge graphics processing units (GPUs), proprietary chips from the likes of Alphabet with Tensor Processing Units (TPUs), and a severe shortage of memory chips, Qnity will benefit. It’s the classic game of “picks and shovels” and the gold rush is AI. Against this backdrop, it’s easy to see why Qnity delivered better-than-expected quarterly results with strong guidance. The demand for computing appears to be insatiable. In addition, as production processes improve, the amount of Qnity materials needed per chip increases compared to old processes. Even better, Qnity has added another exciting layer to its investment story focused on internal improvements. This means we don’t need to rely solely on industry-wide dynamics to drive profits. The company is also trying to clean up its own house. Executives on Thursday detailed a multi-year transformation plan aimed at simplifying operations, increasing productivity and reducing costs. The plan is expected to result in a $100 million increase in EBITDA by the end of 2028. However, there is no free lunch to achieve this; management acknowledges that Qnity will pay about $140 million over the next two to three years, largely in one-time costs. Most will arrive this year and next year. Given that the full-year earnings forecast beat estimates, investors will likely be more than happy to look at these expenses because it will lead to a more profitable company going forward. We liked that among the pillars of the plan, management mentioned automation and the use of specialized artificial intelligence applications. Additionally, strengthening a local-to-local operating model that prioritizes building operations close to end customers would be wise in a world full of trade tensions. In afternoon trading, the stock gave back most of its early morning rise. But we’ll chalk that up to broader sales in the data center hardware complex on Thursday rather than any hidden flaws in Qnity’s results. We’re eager to upgrade Qnity to our buy-equivalent 1 rating, but we’re holding off for now in case this rotation of year-to-date AI hardware winners proves more durable. We are raising our price target to $140 per share from $110 to reflect the strong report and Qnity’s critical place in the AI supply chain. Quarterly results Qnity’s two operating segments (Semiconductor Technologies and Interconnect Solutions) delivered better-than-expected sales. Adjusted EBITDA margins for both segments were light relative to consensus, but since it’s such a new company, we’re not reading too much into that. They’re also investing in growth, which is money well spent right now. The Semiconductor Technologies segment is home to products used directly in the complex process of semiconductor construction. It also covers materials that go into certain TV screens and other electronic displays. Products sold by the Interconnect Solutions segment are more related to advanced packaging and thermal management. The complexity of AI chips is increasing demand for both processes. As the name suggests, this segment is also involved in the manufacturing of “interconnect” products that connect various parts of the data center. Artificial intelligence also increases the demand here. Guidance Management’s targets for full year 2026: Sales of $4.97 billion to $5.17 billion at the midpoint, beating the consensus estimate of $5.06 billion, according to LSEG. FactSet shows adjusted operating EBITDA rose to $1.575 billion from $1.465 billion, slightly below the midpoint consensus estimate of $1.535 billion. Adjusted earnings per share ranged from $3.55 to $3.95, above the $3.14 billion consensus estimate, according to LSEG. Free cash flow was adjusted at $450 million to $550 million, below the $602 consensus estimate, according to FactSet. (Jim Cramer’s Charitable Trust is a long one. See here for a full list of stocks.) When you subscribe 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 trading alert before buying or selling a stock in his charitable foundation’s portfolio. If Jim talked about a stock on CNBC TV, he waits 72 hours after issuing the trading alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, TOGETHER WITH THE DISCLAIMERS. 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