Applied Materials (AMAT - Free Report) reported strong second quarter results, with earnings beating the Zacks Consensus Estimate by 7.9% on revenue that beat by 3.5%. This was a 41% increase on the top line and an 83% increase on the bottom line.

Management laid out all the reasons behind the strong numbers and explained why the strength was likely to continue-

The pandemic did two things: First, it accelerated key technology trends that make semiconductors more pervasive and indispensable in people's lives. And second, it laid bare the highly efficient just-in-time semiconductor supply chain that therefore doesn’t have the flexibility or resilience that will be necessary to cater to the demands of the future.

Capacity additions are an obvious answer to this problem, which will be more regionally dispersed than in the past because of its strategic importance at the national level.  This is of course very good news for equipment sales.

Then there are certain major positive secular trends that will play out over the next decade including digital transformation with obvious growth implications for both semiconductor manufacturers and equipment suppliers; AI computing that will drive demand for new silicon types and therefore fuel semiconductor and equipment sales; the new playbook (after Moore’s Law) to drive power, performance, area, cost, and time to market (PPACt) that will lead to industrywide capex increases favoring equipment makers; and deeper collaborations across the industry gloing beyond the product-focused model to a model based on speed and time to market, thus necessitating retooling.

And in what may be a welcome new trend for equipment makers, customers are providing capex guidance for multiple years, providing better visibility into the future.

So, since many of the factors AMAT management talked about are positive for semiconductor manufacturers as well, one question we may be asking ourselves is whether this is a good time to get into semiconductor stocks.

But it isn’t quite that simple. Equipment stocks are the really hot ones at the moment, so although the industry is somewhat overvalued, it may be the best place to put in some money.

As far as semiconductor manufacturers are concerned, their strong growth will come hand in hand with high investments. So there may not be big gains on the horizon. Particularly because valuations are rather high across most semiconductor segments.

There are a couple of my all-time favorites, i.e. NVIDIA (NVDA - Free Report) and Texas Instruments (TXN - Free Report) , both of which are undervalued at the moment despite strong double-digit revenue and earnings growth expectations for the year.

Another group that looks promising is analog/mixed signal because I see the same strong growth projections and reasonable valuations here. Stocks looking particularly good are MACOM Technology Solutions Holdings, Inc. (MTSI - Free Report) , Silicon Laboratories, Inc. (SLAB - Free Report) , Microchip Technology Incorporated (MCHP - Free Report) , Monolithic Power Systems, Inc. (MPWR - Free Report) , NXP Semiconductors N.V. (NXPI - Free Report) and ON Semiconductor Corporation (ON - Free Report) .