Stellar Earnings Could Drive Applied Materials Stock To Fresh Highs

by Trefis Team
Applied Materials
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Despite already rising 3x from its low in March 2020, at the current price of $114 per share, we believe Applied Materials stock (NASDAQ: AMAT) has further upside potential. AMAT stock has increased from $38 to $114 off the recent bottom, much more than the S&P which increased by around 70% from its lows. Further, the stock is up around 70% from the level it was at before the pandemic. However, we believe that AMAT stock could jump to fresh highs, rising at least 10% to cross its all-time high of $124, driven by expectations of strong demand and strong Q1 2021 results despite the pandemic. Our dashboard What Factors Drove 248% Change In Applied Materials Stock Between 2018 And Now? has the underlying numbers behind our thinking.

The stock price rise since 2018-end came due to an 18% jump in revenue from $14.6 billion in FY 2019 to $17.2 billion in FY 2020 (AMAT’s fiscal year ends in October). After the recent Q1 2021 results, LTM revenues stand at an even stronger $18.2 billion. Further, net margins rose from 18.5% to 21%, driving a 37% rise in EPS from $2.89 in FY 2019 to $3.95 in FY 2020 (with LTM EPS an even higher $4.21).

AMAT’s P/E (price-to-earnings) multiple rose from 11x in 2018 to 15x by 2019 end, and has since jumped to 29x, riding the rally in technology stocks. We believe that the company’s P/E ratio has the potential to rise further in the near term on expectations of continuing demand growth and a favorable shareholder return policy, thus driving the stock price higher.

Where Is The Stock Headed?

The global spread of coronavirus and the resulting lockdowns in early 2020 affected semiconductor demand and industrial activities. However, demand has since risen, and Applied Materials announced strong Q1 2021 earnings, with revenue at $5.2 billion vs $4.2 billion for the same period in FY 2020, a 24% jump. Operating expenses rose in line with revenue, and operating margins came in roughly unchanged at around 25%. However, a slightly lower effective tax rate meant that net income came in at $1.13 billion, driving EPS up to $1.23 from $0.97.

Applied Materials has been helped by rising TV sales during the past few months as demand for in-house entertainment rose sharply due to quarantine, and this is expected to continue in the near-term, driving AMAT’s display revenues higher. Additionally, with the lockdowns being lifted and manufacturing capacity stepping up to pre-Covid levels, we believe the company will see additional revenue and margin growth in the medium term. These factors will raise investor expectations further, driving up the company’s P/E multiple. We believe that Applied Materials’ stock can rise more than 10% from current levels, to set fresh highs over $125.

While Applied Materials stock does seem attractive, 2020 has created many pricing discontinuities which can offer further  trading opportunities. For example, you’ll be surprised how the stock valuation for Activision Blizzard vs. D.R. Horton shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.


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