Is Applied Materials’ Stock Fully Valued?

by Trefis Team
Applied Materials
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Applied Materials stock (NASDAQ: AMAT) is up just 6% since the beginning of this year, but at the current price of around $64 per share, we believe Applied Materials’ stock is fully valued.

Why is that? Our belief stems from the fact that Applied Materials’ stock remains about 31% higher than the low seen at the end of 2017. Our dashboard What Factors Drove 31% Change In Applied Materials Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.

Applied Materials is a major semiconductor company, selling semiconductor fabrication equipment and display products. The stock rise over the past 2 years came despite a 12% drop in earnings per share (EPS), as a 23% drop in net income outweighed a 13% drop in the outstanding share count. Revenue was roughly unchanged from 2017 to 2019, but lower operating margins (23% in 2019 vs 27% in 2017) and a higher effective tax rate (17% in 2019 vs 8% in 2017) led to a 23% drop in net income.

Finally, Applied Materials’ Price-to-Earnings (P/E) ratio rose from 15x at the end of 2017 to 21x at the end of 2019. The P/E dropped to 10x in 2018 due to a drop in semiconductor demand but as the supply glut started clearing out and demand started improving, the P/E rose to 21x by the end of 2019. While its P/E has risen marginally to 22x so far this year, given the volatility of the current situation, there is significant possible downside for Applied Materials’ current multiple, especially when compared with previous years: 15x at the end of 2017, and 21x as recently as 2019.

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

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

Regardless, if there isn’t clear evidence of containment of the virus anytime soon, we believe the stock will see its P/E decline from the current level of 22x to around 18x, which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $52.

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