Up 35% This Year, How Will Applied Materials Stock Trend Following Q4 Results?

Applied Materials (NASDAQ:AMAT) is expected to publish its Q4 FY’23 results on November 16, reporting on another quarter that is likely to see a slowdown in sales due to potentially weaker demand for equipment from the memory market. We expect revenues for the quarter to decline by about 9% year-over-year to about $6.15 billion, roughly in line with estimates. We expect that earnings will stand at about $1.89 per share. See our analysis of Applied Materials Earnings Preview for a closer look at what to expect when the company reports results.

Amid the current financial backdrop, AMAT stock has seen extremely strong gains of 55% from levels of $85 in early January 2021 to around $130 now, vs. an increase of about 10% for the S&P 500 over this roughly 3-year period.
However, the increase in AMAT stock has been far from consistent. Returns for the stock were 82% in 2021, -38% in 2022, and 35% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 9% in 2023 (YTD) – indicating that AMAT underperformed the S&P in 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including AAPL, MSFT, and NVDA, and even for the megacap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could AMAT face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

Semiconductor fabs have been slowing down their budgets for new equipment in recent quarters, following rising supply and easing demand for chips as Covid-19 tailwinds ease for the consumer electronics industry, with sales of laptops, tablets, and smartphones declining versus last year. Although Applied posted a better-than-expected set of results over Q3. Revenue declined by 1.4% year-over-year to $6.43 billion year-over-year as the company witnessed headwinds in the memory market, while sales to foundry and logic chip players were strong. For Q4, the company expects Semiconductor Systems revenues of around $4.75 billion, compared to about $5.04 billion in the year-ago period. The company is projecting services revenue of about $1.42 billion, roughly flat versus last year, with display revenue of about $290 million.

Now, is Applied Materials stock attractive ahead of earnings? Applied Materials stock has gained about 35% this year-to-date and currently trades at about $131 per share. This translates into a valuation of about 18x projected FY’23 earnings, which is a relatively reasonable valuation in our view. Although the company’s revenues and earnings are projected to decline this year, there are multiple positive trends for the stock. The semiconductor industry is likely to expand considerably, driven by trends such as generative AI and cloud computing. Moreover, Applied has also been looking to expand its revenue streams. Earlier this year the company introduced Centura Sculpta, a machine that can reduce the amount of time that semiconductor fabs spend on lithography, taking on Dutch giant ASML which is best known for its extreme ultraviolet lithography technology. We value Applied Materials stock at about $148 per share, which is 13% ahead of the current market price. See our analysis of Applied Materials Valuation for a closer look at what is driving our price estimate for the stock.

[1] Month-to-date and year-to-date as of 10/31/2023
[2] Cumulative total returns since the end of 2016

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