Applied Materials Stock Forecast To Rise

Applied Materials Stock Forecast: Applied Materials, Inc. [NASDAQ: AMAT] develops, manufactures, markets, and services semiconductor wafer fabrication equipment and related spare parts for the semiconductor, flat panel display and solar photovoltaic (PV) industries.

AMAT is the leading producer of machines, equipment, services and software that take care of the complex process of making chips for semiconductor wafer and integrated circuit manufacturers; flat panel liquid crystal display technologies for TVs, monitors, laptops, personal computers and smart phones; solar photovoltaic cells and modules, and other electronic devices manufacturers.

It operates through three segments:

• Semiconductor Systems,
• Applied Global Services, and
• Display and Adjacent Markets.

The company has factories around the world, including United States, China, Korea, Taiwan, Japan, Southeast Asia, and Europe. Applied Materials, Inc. was founded in 1967 and is headquartered in Santa Clara, California, in Silicon Valley.

The Bull Case for Applied Materials

Today, we live in a world where we simply cannot do without semiconductors, which are also known as microchips, or integrated circuits (ICs). These set of electronic circuits on a small flat piece of silicon, are crucial components in every electronics product that we use, ranging from a simple TV remote to highly complex and powerful supercomputers.

While chips themselves are highly resilient, built to easily withstand extreme temperatures, vibrations and other external shocks, the same cannot be said about the global semiconductor supply chain, which is highly fragile and prone to disruptions from natural disasters or man-made events.

What Caused the Current Chip Shortage?

The pandemic caused major automobile manufacturers around the world to temporarily shut production and cancel their orders for chips used in car electronics systems. However, carmakers found themselves in a lurch, when demand for cars jumped more sharply than earlier estimated in the third quarter of 2020. 

The rush to quickly ramp up the production failed to materialize as chip makers could not keep pace with the sudden spurt in demand owing to the long lead times needed to schedule orders.

The dearth of semiconductors then quickly spilled over into other industries, such as consumer electronics and home appliances, products whose sales surged during the pandemic lockdown. The shortage was made worse by panicky chip buyers, who went on a hoarding spree, fearful of supply chain disruption created by the US-China tech war.

As a result, top smartphone makers such as Apple (AAPL), and major automakers around the globe, are forecasting billions of dollars in lost sales, amidst the global shortage of semiconductors. 

Companies like Applied Materials, which provide semiconductor manufacturing equipment for the worldwide semiconductor and semiconductor-related industries, are going to be the major beneficiaries of the semiconductor industry megatrends.

Semiconductor Demand Driving Up AMAT Share Price

Investors would be wise to invest in AMAT’s stock, as the company is betting on continual demand for its semiconductor manufacturing tools against the backdrop of a global chip shortage.

The company delivered a solid Q2, with revenue up 41% on the year to $5.58 billion, and EPS of $1.63, up 83%.

AMAT share price has been soaring, already up more than 50% since the start of the year, and the longer-term secular trends that are driving semiconductor demand means the growth story for AMAT is unlikely to slow down anytime soon. The company also benefitted from a surge in global demand for laptops, PCs and gaming consoles during the pandemic.

“Applied Materials’ record performance is underpinned by broad-based strength across our semiconductor businesses,” said CEO Gary Dickerson on a post-earnings conference call.

Riding on the back of a blockbuster quarter, the company also provided upside guidance, with AMAT expecting net sales of approximately $5.92 billion (consensus: $5.52B) and EPS of $1.70-1.82 (consensus: $1.55). AMAT’s bright outlook indicates that its rapid pace of growth is most likely to continue beyond next two to three quarters.

AMAT Financials Are Looking Ever Better

Applied Material’s semiconductor systems unit, which supplies gears to chip makers, generated revenue of $3.97 billion in the reported quarter, against estimates of $3.86 billion.

On an adjusted basis, the semiconductor manufacturing equipment provider reported $1.63 earnings per share for the quarter, topping consensus estimate of $1.51.  During the same period in the prior year, the firm posted $0.89 EPS.

Applied Materials has switched into a higher gear and analysts expect that momentum to continue. Reeling from severe chip shortage, many countries, including the United States, have stepped up efforts to ramp up their chip production capabilities, and AMAT stands to be a major beneficiary of such a move. In fact, Senate Democrats recently proposed $52 billion for U.S. chips production, R&D efforts and subsidies for chip factories.

Additionally, the World Fab Forecast report by industry association SEMI, spending on semiconductor fabrication equipment jumped 16% in 2020, and is well on track to repeat the stellar performance in 2021 as well as 2022.

Foundry and the memory segments are expected to be the major growth drivers, with foundry spending expected to jump 23% this year to $32 billion, while spending on memory manufacturing equipment is projected to reach $28 billion, followed by a 26% surge in 2022.This could be sweet music to the ears of Applied Materials, as it generates maximum revenue from the semiconductor systems business that caters to these segments.

Applied Materials’ top line, as such, is expected to jump 26% in fiscal 2021, up 8% from the 18% annual growth it recorded last year.

AMAT’s management believes that the company is well on track to surpass the overall market’s performance, which is good news for investors as the market is all set to clock double-digit growth once again.

Also, the company has a solid history of beating earnings estimates. With secular growth to persist into 2022, and a strong beat and guide driven by strength across end-markets, Applied Materials is most likely to continue with its market rally, possibly ending the year on a high.

In fact, it will not come as a surprise if it manages to double its value like last year. All these factors, along with its rather reasonable valuation, make it a top pick for growth investors.  

The Bear Case for Applied Materials

One cause for concern associated with owning AMAT is the company’s slow revenue growth compared to its peers.

In his earnings call, AMAT CEO Dickerson commented that, “We are confident in our ability to outperform our markets as large”.

However, AMAT’s Quarter-over-Quarter semiconductor revenues grew just 11.6%, while mean revenue growth for seven of global top 10 companies, including Tokyo Electron, Screen and ASML, stood at 16.6%.

This can be an early indicator of AMAT’s inefficiency. Losing market share to rivals is considered a very bad omen in the semiconductor business because semiconductor manufacturers purchase processing equipment based on “best-of-breed.”

What it means is that if they purchase AMAT’s equipment and lose market share to rivals, it could indicate that AMAT’s equipment for that process is not the “best-of-breed”.

Also, AMAT is exposed to risks associated with uncertainties of its customers and other companies involved in the semiconductor business. 

AMAT’s revenue growth has been appreciable, but the company has lagged behind its major top-tier competitors. The acquisition of Kokusai Electric also failed to materialize which would have given AMAT an Atomic Layer Deposition (“ALD”) product. The company, with revenues of slightly over $1 billion in 2020, would have significantly helped AMAT.

However, AMAT is well-positioned for growth and undervalued than its peers, which means it is a stock worth keeping an eye on.

Applied Materials Share Price Forecast

One year target prices for Applied Materials’ stock range from a high estimate of 195.00 to a low estimate of 130.00.  

On average, it is anticipated that Applied Materials’ stock price will reach $153.96 in the next year.

The average price target represents an increase of over 16% from the stock’s current price.

Is Applied Materials Stock a Buy?

The digital transformation of the economy and heavy demand for electronic devices has made semiconductors more pervasive and indispensable in people’s lives. This, combined with global chip shortage, makes it important to keep a close watch on semiconductor stocks. And, amidst all the names, one that should be keenly watched is that of Applied Materials, which is the world’s largest supplier of semiconductor manufacturing equipment.

AMAT has the broadest and most enabling portfolio of technologies, spanning materials creation, modification, removal, and analysis. And, as such, its engineering solutions aid in the production of almost every type of chips that are manufactured in the word; which means the company shares a very close relationship with some of the largest chip manufacturers in the world, including Taiwan Semiconductor Manufacturing Company, Intel and Samsung Electronics.

The company had a superb Q2, delivering record revenue that was up 41% year over year. Also, during the quarter, the board approved a new $7.5 billion stock buyback authorization, along with a 9% dividend increase.

AMAT management reported second-quarter fiscal 2021 earnings of $1.63 per share. Also, the top line rose 41% from the year-ago period as well as 8.1% from the previous quarter, aided by strong performance from all the segments, especially Semiconductor Systems. Increasing demand for silicon in several applications across various markets remained a major tailwind.

Semiconductor Systems generated $3.97 billion in sales, or 71% of its net sales, an upswing of 39% year-over-year.

Applied Global Services generated sales of $1.2 billion, or 22% of net sales, an increase of 18% from the prior-year quarter.

Sales from Display and Adjacent Markets were $375 million, or 7% of net sales, up 3% from the year-ago level, thanks to the growing usage of OLED technology in several devices, such as 5G-enabled smartphones and televisions.

Also, Applied Materials, over the past month has declined by around 5%, but over the past year, it has surged around 133%. With slight dip in short-term performance like this, and great long-term performance, investors may want to look at the company’s price-to-earnings ratio, for making a more informed buying decision. The stock is currently down over 12% from its 52-week high, which could represent a buying opportunity for long-term investors.

The price-earnings ratio (P/E Ratio) denotes what the market is willing to pay for a company’s stocks based on its past or future earnings potential. 

AMAT Investment Thesis Conclusion

The world is grappling with acute shortage of semiconductors, and Applied Materials is one of those companies that can serve as an oasis in a desert. 

Applied Materials is a leader in materials engineering solutions used to produce virtually every new chip and advanced display in the world. It, therefore, should not come as a surprise that the company has witnessed unprecedented demand for its semiconductor manufacturing equipment, which is used to fabricate chips and circuits.

The same is reflected in its terrific results quarter after quarter. The chip equipment maker had a knockout Q1 followed by forecast-beating results for the fiscal year second quarter.

The company generated $1.19 billion in cash from operations and returned $952 million to shareholders in the quarter, including $202 million in dividends and $750 million in share repurchases.

The better-than-expected second-quarter results and the strong third-quarter guidance are reflective of the fact that the company is well on track to sustain such impressive growth for a long time to come.

Tight supply conditions and sustainable demand for semiconductors across different verticals means the company is likely to continue to outperform markets at large, and deliver sustainable outperformance over multiple years. 

Applied Materials Stock Forecast Conclusion

For the most part of the past couple of years, AMAT traded on the sidelines amid the escalating US-China trade war. Now, with global chip shortage and buzz surrounding technological developments like AI and IoT, demand for leading semiconductor manufacturing equipment is soaring, helping AMAT move on a clear path towards growth.

No wonder AMAT’s stock is up so much this year. Moreover, a proposed $52 billion boost in U.S. government funding for semiconductor production and research could result in seven to 10 new U.S. factories, thus directly benefitting companies like Applied Materials.

It is also important to note that there is more to AMAT’s growth apart from the government’s push for regionalized manufacturing and global chip shortage. The chip equipment maker is also poised to benefit from evolving technology centered around AI and other custom-built applications.

Management’s positive outlook, increasing global focus on advanced chip production, and President Biden’s proposed $50+ billion stimulus package to boost semiconductor manufacturing and research in the country over the next five years, could all serve as a catalyst to drive AMAT’s revenues higher across all segments.

The stimulus package has been proposed to counter China’s growing might in semiconductor production, and also to address the chip shortage affecting US automakers and other industries in the country. The package, if approved, will tremendously benefit AMAT as it controls over 40% of the market in US operations.

Semiconductors are an essential component of all modern electrical devices. The global semiconductor shortage and fast-evolving technology directly favors AMAT’s business models.

The company, which provides manufacturing equipment, services, and software to the global semiconductor, display, and related industries is uniquely positioned to maintain its leadership position in US operations. It is a well-diversified company, with a broad portfolio of equipment that are used to make almost every type of chip in the world.

AMAT has an ambitious 10-year plan of developing a sustainable end-to-end semiconductor supply chain. It aspires to use 100% renewable energy in its US operations by 2022 and worldwide by 2030. AMAT is also well-positioned to leverage the rapid growth being witnessed in DRAM (dynamic random-access memory) market.

After three consecutive quarters of 20%+ revenue growth, growth accelerated for AMAT in the latest quarter, surging 41% to $5.6 billion. Adjusted earnings in the company’s fiscal second quarter jumped 83% to a $1.63 a share.

Management expects momentum to continue into the back half of 2021 and anticipates Q3 revenue to be up 35% year-over-year. It forecasts earnings of $1.70 to $1.82 a share on sales of $5.72 billion to $6.12 billion, above consensus estimate of $1.57 a share on revenue of $5.55 billion.

AMAT’s Board also reiterated its commitment to return between 80% and 100% of its free cash flow to shareholders.

AMAT has a good chance of meeting its third-quarter guidance with a clear path and a well-executed strategy. It is most likely to continue its upward trend as demand for AMAT’s services continue to increase.

Demand growth is expected to continue in the near-term as the company stands to benefit directly from the rapid advancement of the economy toward digital transformation, and the growing demand for real-time connectivity and cost-effective cloud systems. Also, AMAT is undervalued in comparison to its peers and to its forward EV/EBITDA multiple of 15.9x.

Takeaway

Solid stock price performance, strong competitive advantage, secular growth acceleration, strong record of EPS growth, impressive revenue growth, good dividend, and reasonable valuation levels, are all indicative of the fact that AMAT should continue to move higher in coming years. 

Also, companies and countries across the globe are scrambling to enhance their own in-country chip production which, in turn, means larger number of buyers for chip-making machines and equipment supplied by Applied Materials.

Buoyed by strong Q2 results, AMAT came up with a sanguine guidance predicting almost two years of growth, which indicates the chip gear vendor is getting a strong signal from some of the largest customers in the business. All in all, investors should keep an eye on this solid-growth stock which looks worth owning for the long haul.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.