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Applied Materials Stock: Still Not Very Cheap
Stock Analysis & Ideas

Applied Materials Stock: Still Not Very Cheap

Applied Materials (AMAT) supplies manufacturing equipment, services, and software, primarily to the semiconductor and display industries. The company offers products and services that enhance a device’s performance, yield, and cost.

Applied’s semiconductor division, which is the company’s main revenue driver, develops, produces, and sells a broad range of manufacturing equipment utilized to fabricate semiconductor chips, also known as integrated circuits (ICs). It comprises semiconductor capital equipment used for many stages of the chip-making process, including the transfer of patterns into device designs, metrology, inspection, and review.

With demand for semiconductors constantly growing and the global supply chain crisis enduring, Applied Materials experiences strong pricing power. Hence, I expect the company to continue expanding its revenues and net income in the coming years at a swift pace.

However, investors should be cautious regarding Applied’s valuation multiple since the company’s business model can be vulnerable to the industry’s periodical cyclical traits.

Latest Earnings

Applied Materials’ Q4-2021 results were rather strong, with total revenues coming in at $6.12 billion, showing 31% growth year-over-year. EPS reached $1.94 on an adjusted basis, growing 55% year-over-year.

For the year, the company achieved a non-GAAP operating margin of 31.7%, and for the quarter, the margin was 33.1%, which points towards further progress.

Particularly, Semiconductor System sales expanded 40% to $4.3 billion, while Applied Global Services revenues were $1.37 billion, an increase of 24% versus the comparable period last year. That said, Display and Adjacent Markets saw their revenues slip by 14% to $417 million.

While Applied delivered rather impressive results and growth metrics during the Fiscal Year 2021, Mr. Market was likely disappointed with management’s guidance, resulting in shares lagging post-earnings.

For the first quarter of 2022, the company expects net sales to land at approximately $6.16 billion, plus or minus $250 million. This estimate includes the projected effect of the current supply chain hurdles. Non-GAAP adjusted diluted EPS is expected to be between $1.78 and $1.92. That said, I find Applied’s guidance to be rather pleasing, as it still indicates revenue and EPS growth of 19.3% and 33% compared to last year, respectively.

Wall Street’s Take

Turning to Wall Street, Applied Materials has a Strong Buy consensus rating, based on 14 Buys and four Holds assigned in the past three months.

At $180.94, Applied Materials stock projections suggest a 40.3% upside potential.

Conclusion 

Applied Materials plays a key role in the semiconductor industry, and the company is likely to keep enjoying robust demand for its products and services going forward.

While the stock’s yield of around 0.7% may indicate minimal capital returns, Applied Materials has never cut its dividend since initiating payments in 2005. Based on its current trajectory, I would expect a hike this year.

The company certainly features a great moat and overall competitive advantages. That said, based on Fiscal Year 2022 EPS estimates of around $8.15, the stock’s forward P/E stands at around 15.8. That still implies a slight premium for the semiconductor company, so investors should not ignore the risk of a potential valuation multiple compression. I am neutral on the stock.

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