Share prices of Applied Materials (NASDAQ: AMAT) have already rocketed 73% over the last 12 months, and yet analysts at Bernstein still see another 19% upside potential in the next 12 months. Earlier this week, the wealth management firm maintained its outperform (buy) rating while raising the price target from $230 to $240. The stock currently trades at around $202 a share.

Why is Applied Materials' stock up?

Applied Materials is a leading supplier of equipment used to make silicon wafers for the chip industry. The company's quarterly revenue growth slowed to a halt in 2022 but an improving outlook for the industry has some analysts on Wall Street becoming more bullish on the stock's prospects.

Investment in advanced logic chips used for artificial intelligence (AI) could become a growth catalyst. AI is only contributing about 6% to new wafer starts right now but it's projected to grow over 30% per year over the next several years.

Still, management's guidance calls for revenue to be down approximately 2% year over year in the company's April-ending fiscal second quarter, so the business is still in recovery mode.

Investors are making a bet that the company is on the verge of seeing its growth significantly accelerate due to the interest in AI chips and other markets that could provide a boost to Applied Materials' business over the next few years. The Wall Street consensus has the company's earnings per share growing 15% per year over the next five years.

Keep in mind that Applied Materials' shares are not cheap, trading at a forward price-to-earnings ratio of 24. This is historically a fair valuation for Applied Materials. Almost all of the stock's return over the last year was driven by investors paying a higher P/E for the shares. Investors should expect the stock to perform in line with the company's underlying earnings growth from here.

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