AI Chip Demand Gives Linde a New Growth Catalyst

Key Points

• Linde's electronics backlog reached a record $8.1 billion, driven by surging semiconductor fab demand tied to the AI buildout.
• Despite record sales and earnings growth, Linde's shares fell about 6% on earnings day after operating margins slipped due to its struggling Lincare home care unit.
• Analysts remain overwhelmingly bullish, with 21 of 23 rating Linde a Buy and a consensus price target implying roughly 13% upside from current levels.

Linde NASDAQ: LIN has been selling gases—nitrogen, oxygen, argon, and hydrogen—for more than a century, mostly to hospitals, food companies, and refineries.

Now, though, it’s riding the wave of surging semiconductor demand and a record $8.1 billion backlog.

While industrial gases are not the first thing many tech-focused investors think about, for Linde, the tech space has helped earn it an overwhelming Buy recommendation from analysts. The artificial intelligence buildout has turned semiconductor fabs into one of Linde's fastest-growing markets.

Yet the stock is holding back. To understand the strengthening growth story and a sagging share price, investors should understand the broader issues facing the company.

Record Sales Meet New Margin Pressure

On the surface, Linde's July 31 report looked excellent. Sales rose 9.3% to a record $9.29 billion, with underlying sales up 4% from a mix of 2% higher prices and 2% higher volumes. That beat the $9.02 billion analysts expected.

Earnings grew even faster. Diluted earnings per share were up 11.3% to $4.15. Adjusted earnings per share (EPS) climbed 10% to $4.50, edging past the $4.49 consensus. Linde also continued to buy back stock and pay dividends, returning $1.59 billion to shareholders in the quarter.

The blemish, though, was profitability. Adjusted operating profit was up 7%, but the adjusted operating margin slipped to 29.5%, down 60 basis points from a year earlier. For a company that has built its margins, that was enough to send the shares down about 6% on earnings day.

Lincare Emerges as the Main Margin Drag

Operationally, the primary culprit was Lincare, Linde's U.S. home care business, which supplies oxygen and respiratory equipment to patients at home. CEO Sanjiv Lamba said cost inflation and policy changes have made Linde's efforts to prune the unit difficult. As a result, he raised the possibility of selling the unit, telling analysts the company was evaluating "the strategic fit of this U.S. home care business within Linde, both in part and as a whole."

Still, the core engine kept humming. Electronics sales grew 18% in the quarter, and management raised the low end of its full-year adjusted EPS outlook to $17.70 to $17.90, implying growth of 8% to 9%.

AI Chip Demand Is Powering Linde’s Backlog

The heart of the investment thesis is straightforward. Linde's contracted sale-of-gas backlog hit a record $8.1 billion after the company added $1 billion in new electronics work.

On the same day as earnings, Linde announced it will invest $1 billion to build two new air separation units in Phoenix for one of the world's largest semiconductor manufacturers, supplying gases for two new fabs.

Lamba said he expects electronics to remain Linde's largest backlog contributor and one of its fastest-growing markets, with more than 20 projects worth about $1.3 billion set to start up before year-end. Other industrial markets were also improving, with aerospace accounting for more than a third of manufacturing growth in the quarter.

Slower Growth Tests Linde’s Premium Valuation

There are reasons for concern, however, and the market has picked up on many of them.

Shares are currently trading roughly where they were a year ago. Although up about 14% from the start of this year, they’ve dropped about 10% in the past three months.

Linde's premium valuation is one issue. The company has relied on its ability to expand margins, and that streak is being questioned. Barely beating per-share expectations also didn’t help; at the same time, there’s sluggish industrial demand outside the U.S. market.

Margins in Asia also slipped because Linde is selling lower-margin equipment to electronics customers, the company said, though they expect that business to recover in the coming quarters. Management's third-quarter outlook of $4.45 to $4.55 in adjusted earnings per share implies slower growth of 6% to 8%.

Linde is scheduled to report third-quarter results on Oct. 29. Beyond the headline earnings figures, investors will be watching for any update on the strategic review of Lincare, whether margin pressure is beginning to ease, and how quickly the company is converting its record sale-of-gas backlog into revenue as new electronics projects come online. The report could help determine whether the recent weakness in the stock is a temporary pause or a sign that growth is starting to moderate.

Perhaps the more important risk, though, is what investors are paying for growth that is steady rather than spectacular. If chipmakers slow their fab buildouts, some of that investment could earn less than planned.

Even with these areas of caution, analysts remain firmly in Linde's corner. Twenty-one of the 23 analysts tracking the company rate it a Buy, with two extending it to a Strong Buy. Only two analysts rate it a Hold.

Overall, the consensus 12-month target price is $546.80 per share, about 13% up from current trading levels. The highest price target is $580 per share, while the lowest is $460.

The Recent Dip May Offer an Opportunity

These days, Linde finds itself in a somewhat in-between investment state. It is not one of the high-flying growth stocks, and it is not one of the bargain-bin value stocks either.

It is a high-quality compounder that has perhaps just hit a pothole. The stock market today is treating the Lincare problem as a possible reason to sell. But the bigger story is a record backlog tied to AI chip demand that should drive growth for years.

Assuming margins return and the third quarter report comes in healthy, the recent dip in price might look like a solid opportunity.