Stock of the Day

December 2, 2024

Applied Materials (AMAT)

$168.72
+$4.53 (+2.8%)
Market Cap: $135.40B

About Applied Materials

Applied Materials, Inc. engages in the provision of manufacturing equipment, services, and software to the semiconductor, display, and related industries. The company operates through three segments: Semiconductor Systems, Applied Global Services, and Display and Adjacent Markets. The Semiconductor Systems segment develops, manufactures, and sells various manufacturing equipment that is used to fabricate semiconductor chips or integrated circuits. This segment also offers various technologies, including epitaxy, ion implantation, oxidation/nitridation, rapid thermal processing, physical vapor deposition, chemical vapor deposition, chemical mechanical planarization, electrochemical deposition, atomic layer deposition, etching, and selective deposition and removal, as well as metrology and inspection tools. The Applied Global Services segment provides integrated solutions to optimize equipment and fab performance and productivity comprising spares, upgrades, services, remanufactured earlier generation equipment, and factory automation software for semiconductor, display, and other products. The Display and Adjacent Markets segment offers products for manufacturing liquid crystal displays; organic light-emitting diodes; and other display technologies for TVs, monitors, laptops, personal computers, electronic tablets, smart phones, and other consumer-oriented devices. It operates in the United States, China, Korea, Taiwan, Japan, Southeast Asia, and Europe. The company was incorporated in 1967 and is headquartered in Santa Clara, California.

Applied Materials Bull Case

Here are some ways that investors could benefit from investing in Applied Materials, Inc.:

  • The current stock price is around $155, which may present a buying opportunity for investors looking for value in the semiconductor sector.
  • Applied Materials, Inc. has a strong consensus rating of "Moderate Buy" from analysts, indicating positive sentiment and potential for price appreciation.
  • The company recently increased its quarterly dividend to $0.46 per share, reflecting a commitment to returning value to shareholders and a healthy dividend payout ratio of 22.38%.
  • With a market capitalization of approximately $126 billion, Applied Materials, Inc. is a significant player in the manufacturing equipment sector, providing stability and growth potential.
  • The company has authorized a share repurchase program, allowing it to buy back up to 8.2% of its shares, which can signal to investors that the board believes the stock is undervalued.

Applied Materials Bear Case

Investors should be bearish about investing in Applied Materials, Inc. for these reasons:

  • Recent target price reductions by analysts, such as Barclays lowering their target from $190 to $160, may indicate concerns about future performance.
  • The stock has experienced volatility, with a 1-year high of $255.89 and a low of $123.74, suggesting potential risks for investors.
  • One analyst has issued a sell rating, which could reflect underlying issues that may affect the company's stock performance.
  • Despite a strong market position, the company faces competition in the semiconductor industry, which could impact its growth prospects.
  • The current economic environment may pose challenges, including supply chain disruptions and fluctuating demand for semiconductor manufacturing equipment.

Applied Materials Market Capitulates: Now is the Time to Buy

Written By Thomas Hughes on 11/18/2024

applied materials sign

The Applied Materials (NASDAQ: AMAT) market capitulated following the Q4 results and guidance, cratering in premarket action to gap lower and open near break-even for the year. The capitulation was caused by lackluster guidance, but the bar was high, and Applied Materials failed to impress. The takeaway for investors is that this company is well-positioned for long-term growth, has sustained positive cash flow and capital returns, and is now trading at rock-bottom prices

Applied Materials' focus on materials engineering is critical to advancing semiconductor technology. The increasingly complex microchips rely on miniaturization and, in turn, durability, which are areas in which AMAT excels. The chips need to be more durable the smaller they get because of AI's manufacturing process and intense power loads.

Applied Materials is the leader in this field because it has the most comprehensive portfolio of tools for modifying materials at the atomic level. Its tools and services span semiconductor manufacturing, providing an integrated, one-stop solution for semiconductor manufacturers and labs. Here are three reasons why now is a good time to buy it

Applied Materials had a Good Q4 and 2024

The first reason Applied Materials is a buy is that it had a good year, with revenue and earnings exceeding the consensus estimates and guidance improving throughout. The take in Q4 topped $7.0 billion in consolidated revenue, good for a gain of nearly 5% to outpace MarketBeat’s reported consensus by over 100 basis points and set a company record.

The strength was driven by growth in two of three segments, with the weakness centered on Display, which is only 3% of the net. Services grew by 11%, while the semiconductor solutions segment, 73% of the revenue, grew by 6%. Within the semiconductor solutions segment, Foundry was strongest taking 400 basis points of share contribution from DRAM and momentum is expected to build in Q1. The guidance is forecasting growth to accelerate. 

Applied Materials Business Strong Cash Flow Funds Healthy Capital Return

The second reason Applied Materials is a buy is that the business is operationally sound and drives value for its investors. The company has strong margins, robust cash flow, a healthy balance sheet, and the ability to pay investors. Highlights from Q4 include record operating income with a 29.3% margin, $2.58 billion in cash from operations, a 75% increase in quarterly free cash flow (flat for the year), and free cash flow of $2.168 billion. 

Capital returns are 65% of the free cash flow for the year, with both expected to remain strong in 2025. Capital returns include a dividend and buybacks. The dividend is below the broad market average regarding its yield, about 1%, trading at long-term lows, but the distribution is safe at less than 20% of the earnings and can be expected to grow. The buybacks are more substantial, more than 3X the dividend on a dollar basis, and reduced the share count by 1.6% for the quarter and 1.3% for the year. 

The Guidance is Good and Likely Cautious

The guidance for FQ1 was mixed and tepid regarding the consensus estimate but no less good for investors. The company is guiding for sequential and YOY growth, with YOY growth to accelerate from Q4. Revenue is expected to be near $7.15 billion at the mid-point compared to $7.25 billion forecasted by analysts, which is a slim margin of error and easily overcome. Applied Materials has beaten its revenue target in the last ten consecutive quarters and will likely do so again. 

Even so, the earnings guidance is good, with adjusted EPS expected above the consensus for the quarter. With revenue expected to be strong, the final result for earnings will likely also exceed the company’s guidance. The critical detail is that the cash flow will grow, improving the balance sheet health and capital return outlook.

As it is, the balance sheet is a fortress with cash and assets growing, liabilities under control, and equity up 16%. Leverage remains low, the company is net cash, and the trends supporting the balance sheet health will continue in 2025. 

AMAT Stock price

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