(FORTUNE Magazine) – What's the hottest tech company you've likely never heard of? Applied Materials of Santa Clara, Cal., whose stock has quadrupled over the last 12 months. A 30-year-old company with 1996 sales of $4.1 billion and profits of $600 million, Applied seems a slightly more reliable bet than, say, a search engine with a few months of revenues and minuscule profits. Among all FORTUNE 500 companies, Applied ranks No. 1 in earnings-per-share growth over the past decade and ninth in total return to investors. So why isn't it a household name?

While Applied's lock on its corner of computerdom is nearly as tight as Microsoft's and Intel's on theirs, Applied makes a profoundly unsexy product: semiconductor capital equipment, the machines that transform raw wafers of silicon into finished chips. Not surprisingly, Applied lacks a catchy slogan. In a more equitable world, chips would carry a little decal saying "Applied Inside."

Applied equipment dominates nearly every step in chip manufacturing. Its market share ranges from a high of 62% of the industry's PVD equipment ("physical vapor deposition," in which molecules of conductive material are deposited in layers on the surface of a wafer) to 29% of all plasma etching machines (in which ionized gases eat away portions of those layers, leaving behind circuit lines as thin as 0.25 microns. The thinnest human hair is 50 microns wide).

Intel, Fujitsu, Motorola, Micron Technology, and other top chipmakers keep Applied's phone number on hand, since Applied not only builds their machines but fixes them when they break. The owner of an etcher costing somewhere from $1.5 million to $3.5 million kind of hates to see it sit idle. Worse, one machine going down can compromise the output of an entire "fab," the chip-fabrication plants that can cost $1 billion or more to build. CEO James Morgan, a man not given to effete understatement, puts it this way: "Our customers trust us with the family jewels."

Despite operating in a famously cyclical industry, Applied has managed to turn a profit even during troughs and has now piled up $1 billion in cash. In fact, it's been consistently profitable every year since 1983. (It took a while to get in the black, however: The company was founded in 1967 and was nearly bankrupt by the time Morgan arrived as president in 1976. He refocused the company on making semiconductor equipment exclusively, but it wasn't until 1981 that Applied had its first monster hit: an etching machine.) One thing that helps smooth the cycles is the company's strength overseas: 70% of sales are generated outside the U.S.; more than 50% come from Asia. Since not all semiconductor markets around the world move in sync, Applied's diversification insulates it from the wild swings of the U.S. market.

Applied's size also gives it an edge. The company is far and away the biggest player in the business, with sales more than three times greater than those of its primary U.S. competitors: Lam Research of Fremont, Cal., Teradyne of Boston, and Novellus of San Jose. No competitor offers so wide a range of chip-making products. Applied has consistently been "firstest with the mostest," getting 42 new products to market in the past ten years, some in as little as nine months. "Next year 85% of our revenues will come from products we didn't have 18 months ago," says Joseph Bronson, president of Applied's etch products group. Such product innovation requires robust expenditures on research and development, to say the least. Last year Applied spent $481 million on R&D--$20 million more than Novellus' 1996 revenues.

Finding securities analysts not in love with Applied isn't easy. One of the few skeptics--Eliot Glazer of broker-dealer du Pasquier & Co. of Manhattan--considers Applied's stock fully valued now and cites misgivings about the company's exposure in Thailand, Indonesia, Singapore, and other markets he considers wobbly. Indeed, a Thai customer recently canceled a $16 million order. Morgan dismisses the cancellation as insignificant, since Applied managed to resell the equipment elsewhere. Applied's stock, which as of late September was trading about ten points below its 52-week high of 108, packs a plump price/earnings ratio of 46. Asked if his company's stock isn't maybe fully valued, Morgan betrays mild annoyance: He is building for the ages, it seems, not the moment. He later sends FORTUNE a fax that reads, "You asked about the valuation of Applied Materials. The real question is, What will a very unique corporation that has the real potential to become one of the great global corporations of the 21st century be worth?"

The answer is "more"--unless the whole chip industry tanks. At the moment, chip sales (which lead equipment sales by about three months) are rising. Sales this year should hit $138 billion, up modestly from 1996. Sue Billat, who follows Applied for investment banker Robertson Stephens, notes that some equipment makers, in expectation of stronger demand (and seeking greater manufacturing efficiencies), have begun ordering new equipment already. This spring Applied received the largest single order ever reported in the industry, from a Taiwanese chipmaker that wanted $182 million worth of equipment. Since the final quarter of 1996, Applied's book-to-bill ratio (new orders vs. current billings) has firmed from 0.79 to 1.17.

More auspicious for Applied is a huge pending change in manufacturing technology. Currently chips are cut from silicon wafers that are 200 millimeters (eight inches) in diameter. Seeking better yields, chipmakers are graduating to larger, 300-millimeter (12-inch) wafers, from which they will be able to harvest 2.25 times as many chips. This is no minor engineering tweak: Existing 200-millimeter machines can't be modified to handle the larger wafers, so new equipment must be bought, to the tune of tens of billions of dollars.

How much of this melody will waft Applied's way? Says Morgan: "Of $18 billion to $37 billion in initial spending, we'd be happy to get 30% to 35%." (Who wouldn't?) Applied is touting itself as the only provider of a complete, soup-to-nuts 300-millimeter system. Much of Applied's R&D budget has been devoted to developing a new line of equipment that can accommodate the larger wafers, and the company is converting a 60,000-square-foot building at its Santa Clara headquarters into a model 300-millimeter fab. When it's finished, customers will be able not only to kick the tires of individual machines but also to see how the entire line works in concert.

INSIDE: Making instant cartoons, page 258... Microsoft's cool new browser, page 260... Playboy's fight with the feds, page 264... Alsop on wearable computers, page 269