Has Applied Materials’ Stock Peaked Around $60?

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Downside
206
Market
202
Trefis
AMAT: Applied Materials logo
AMAT
Applied Materials

Applied Materials stock (NASDAQ: AMAT) is roughly unchanged since the beginning of this year, and at the current price of around $60 per share, we believe Applied Materials has a significant downside.
Why is that? The key is AMAT stock is still about 86% higher than it was at the end of 2018, a little over a year ago. Our dashboard What Factors Drove 86% Change In Applied Materials Stock Between 2018 And Now? provides the key numbers behind our thinking, and we explain more below.

This rise over the last year came despite a roughly 12% drop in AMAT revenues, owing to the semiconductor supply glut. However, the company was able to control expenses in line with the revenue drop, and net margins in fact expanded by 2%. Net income decreased by 11% from $3 billion to $2.7 billion over this period.

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Further, an earnings drop, on a per share basis, came in at around 4%, slightly supported by share buy-backs worth over $2 billion. Specifically, stock repurchases by AMAT led to an almost 8% drop in the outstanding share count, over the past year.

Finally, Applied Materials’ P/E ratio nearly doubled, going from 11x in 2018 to almost 21x by the end of 2019, due to rising investor expectations for FY ’20 and ’21, given that semiconductor demand is back on track. While Applied Materials’ P/E is still around 21x, given the volatility of the current situation, there is a significant additional possible downside for AMAT’s multiple when compared to levels seen in the past years – for example, a P/E of 11x at the end of 2018.

So what’s the likely trigger and timing to this downside?

The global spread of Coronavirus has meant there is much lower demand for devices across all markets, which means lower semiconductor demand, and lower demand for Applied Materials’ display products as well. In addition, there have likely been supply disruptions in China and elsewhere from the global Coronavirus crisis. We believe Applied Materials’ Q3 results in August will confirm the hit to its revenue. It is also likely to accompany a lower Q4 as-well-as 2020 guidance.

If there isn’t clear evidence of containment of the virus at the time of the earnings announcement, we believe the stock will see its P/E decline from the current level of 21x to 16x (the average of the P/E level over the past 2 years), which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $45.

For more insights into how Covid-19 could impact Applied Materials’ semiconductor peer Texas Instruments, view our interactive dashboard Texas Instruments Downside: How Low Can Texas Instruments Stock Go?.

Our dashboard forecasting U.S. COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture.
The complete set of coronavirus impact and timing analyses is available here.

 

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