Demand Revival Could Drive Applied Materials Stock To Fresh Highs

by Trefis Team
Applied Materials
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Up more than 3.5x already from its low in March 2020, at the current price of $135 per share, we believe Applied Materials stock (NASDAQ: AMAT) has further upside potential. AMAT stock has risen from $38 to $135 off the recent bottom, much more than the S&P which increased by over 80% from its lows. Further, the stock is up around 2x from the level it was at before the pandemic. However, we believe that Applied Materials stock could rise to fresh highs, rising more than 10% to cross its all-time high of $146, driven by expectations of steady demand growth and strong Q1 2021 results despite the pandemic. Our dashboard What Factors Drove 318% 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 3% rise in revenue from $16.7 billion in FY 2018 to $17.2 billion in FY 2020 (Applied Materials’ fiscal year ends in October). Further, net margins rose from 18.2% to 21%, and combined with a 10% drop in the outstanding share count, this drove a 32% rise in EPS from $3.00 in FY 2018 to $3.95 in FY 2020.

Applied Materials’ P/E (price-to-earnings) multiple rose from 11x in 2018 to 22x by 2020 end, and has since jumped to 34x, 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 gotten back on track, and this is evident from Applied Materials’ strong Q1 2021 earnings, where revenue came in 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 at 25%, roughly the same level as in Q1 2020. However, a slightly lower effective tax rate saw net income rise to $1.13 billion, driving EPS up to $1.23 from $0.97.

Demand growth is expected to continue in the near-term, driving AMAT’s revenues higher across all segments. Additionally, with the lockdowns being lifted and manufacturing capacity rising back to pre-pandemic 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 $146.

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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