Will Applied Materials Stock Recover?

Applied Materials Is Powering AI Technologies

Artificial intelligence requires high-performance, advanced chips for fast processing speeds, and in turn are dependent on semiconductor chips whose manufacture is further reliant on cutting-edge equipment and processes supplied by Applied Materials.

As AI evolves, demand is growing for data processing, machine learning, and neural networks, all of which require high-performing, efficient, and dependable chips.

The increase in data center investments and mobile device sales are set to act as a tailwind that benefits Applied Materials because it provides the tools and equipment used in the fabrication of AI-specific chips, such as GPUs and TPUs.

The company’s equipment manufacturing expertise is key to producing the high-density, high-performance chips needed for AI applications. But to what extent will this affect AMAT?

The global AI chip market is projected to reach $383.7 billion by 2032, growing at a CAGR of 38.2%.

As demand for data centers rises to support AI industry growth, increasingly sophisticated semiconductors from the likes of NVIDIA are crucial to manage and process of large amounts of data. And chip designers depend on the likes of TSMC and Applied Materials to support manufacturing.

For Applied Materials, the challenge to keep pace with chip design innovations is no mean feat. It’s got to offer the newest equipment to optimize the performance and efficiency of these chips.

So far so good, though, as evident in the numbers. Sales are up by 9.7% annually over the past 5 years and the pace is expected to slow only marginally to 7.7% in the next 5 years.

One of the reasons the future looks good is SmartFactory by Applied Materials, but what exactly is it?

What Is Applied SmartFactory?

SmartFactory is Applied Material’s automation software portfolio that can streamline the manufacturing process via automation, real-time data analytics, and machine learning. These tools are designed primarily with manufacturing in mind to increase efficiencies, boost productivity, and elevate production standards.

SmartFactory has a range of industry applications and has been gaining popularity in the pharma industry in particular because it works as an end-to-end automation software. It’s already proven effective in cutting down development time and improving manufacturing outcomes. It also can be used to boost the rate of throughput, and so reduces the risk and time taken to bring new products to market.

SmartFactory has gone from strength to strength, not least because of acquisitions that have been integrated into the digital tool. For example, in 2020, Applied Materials took over Perceptive Engineering Ltd., a market leader in advanced process control and model predictive control in the pharmaceutical industry, and was able to create synergies with Applied Materials’ SmartFactory Rx®.

AMAT Revenues Were So-So Recently

Applied Material’s revenue came in at $6.65 billion in the last reported quarter, which was flat year-over-year but its bottom line remained steady with non-GAAP EPS reported at $2.09, up 5% versus last year.

The company’s financial health is underpinned by the $1.39 billion in cash from operations and notably the Board chose to allocate a substantial portion back to shareholders when distributing $820 million in share repurchases and $266 million through dividends. It has now increased its dividends by over 10% CAGR over the past five years.

The company expects net revenue to be approximately $6.65 billion, plus or minus $400 million in the current quarter, while non-GAAP EPS is expected to be in the range of $1.83 to $2.19.

Clearly, what’s needed for the stock to ignite once more is a new catalyst related to artificial intelligence as a top and bottom line growth driver, but will it happen?

Will Applied Materials Stock Recover?

Applied Materials stock is likely to recover as the growth in data centers that are necessary for AI applications show no signs of slowing down in the near future. 

If analysts are right, Applied Materials stock has the potential to run all the way to $238 per share before reaching fair value.

Clearly, there are reasons to be bullish, not the least of which is the hike in the dividend in each of the past 6 years. It now sits at 0.88% but has a very low payout ratio of just 15.8%.

So too are analysts increasingly optimistic about its prospects with 20 of them upgrading their forecasts for earnings over the coming quarter.

The bottom line is the firm’s focus on innovation, coupled with heavy investments in research and development, should support it capturing market share and riding the AI wave.