This Strategy Pays You 12% While Lining Up AMAT at Bargain Prices
At about $319.08 a share, Applied Materials (AMAT) is trading near its 52W high.
Do you think AMAT stock is a good long-term bet at current levels? What about at a 30% discount at about $220 per share? If you think that is a steal, and have some cash ready to go, here is a trade.
12% annualized yield at 30% margin of safety, by selling Put Options.
- Sell a long-dated Put option expiring 1/15/2027, with a strike price of $220
- Collect roughly $1,795 in premium per contract (each contract represents 100 shares)
- That’s about 8.2% annualized yield on the $22,000 you’re setting aside for the possibility of buying the stock
- This cash parked in a savings or money market account will earn an extra 4.0%, taking total yield to 12.2%
- And you give yourself a chance to buy AMAT stock at deep discounted price of $220
However, this is not the only stock strategy in town. Trefis High Quality Portfolio is a sophisticated framework designed to reduce stock-specific risk while giving upside exposure.
Possible Trade Outcomes: You Win Either Way
| Stock Price Outcome | What It Means For You |
|---|---|
| AMAT stays above $220 | You keep the full $1,795 premium – 8.2% extra income over the next 365 days on cash that might otherwise earn you 4.0% or less. You never buy the stock and simply walk away with the cash. |
| AMAT closes below $220 | You’ll be obligated to buy 100 shares at $220. But thanks to $1,795 premium, your effective cost basis is just $202.05 per share – a roughly 37% from current level. |
But to hold this trade with conviction, you want to see long term upside in the stock. Because if it comes to it, you want to be excited about buying the stock cheap.
First, you want fundamentals to check out. For details, see Buy or Sell AMAT Stock or check Applied Materials Investment Highlights
Second, you want to better understand competitive advantage and industry tailwinds. Below is what specifically gives us the conviction.
Why Hold AMAT Stock Long-Term
Applied Materials is a market leader in the semiconductor equipment industry, which is poised for significant long-term growth driven by secular megatrends like AI, 5G, and the electrification of vehicles. The company’s deep integration with its customers and its shift towards a recurring revenue model provide a durable competitive advantage. The cyclical nature of the industry may create opportunities to acquire a high-quality asset at a discount.
Competitive Advantage
We classify AMAT’s economic moat as WIDE, with the primary source being Switching Costs
- Applied Materials is shifting its services business towards a subscription model, with long-term agreements now accounting for about 60% of its recurring parts, services, and software revenue.
- The company’s Applied Global Services (AGS) division provides maintenance, upgrades, and analytics to optimize equipment throughout its lifecycle, creating a predictable recurring revenue stream and high levels of client retention.
- The high cost and complexity of integrating new semiconductor manufacturing equipment into a fabrication plant, which can cost billions of dollars to build, creates significant inertia and a preference for incumbent suppliers.
- AMAT’s on-site service presence at customer factories allows for immediate issue resolution, which is critical in an industry where machinery downtime can be extremely costly.
See Applied Materials Full Analysis.
Industry Tailwind
The industry tailwind is STRONG, with CAGR projection of 9.21% (Source: SNS Insider)
Secular Trend: Artificial Intelligence (AI), 5G, IoT, and Automotive electronics
Key Risks: The semiconductor industry is cyclical in nature, with periods of high demand often followed by downturns due to inventory buildup or shifts in global economic conditions. Geopolitical tensions and trade restrictions, particularly between the U.S. and China, pose a significant risk to the industry.
Financial Guardrails
Cash Generation: Positive Free Cash Flow
Balance Sheet: Applied Materials maintains a strong balance sheet with more cash and short-term investments than total debt, indicating a low risk of bankruptcy. The company has a manageable debt-to-equity ratio.
Not comfortable with options or stock-specific trades? PORTFOLIOS are even better.
The Right Way To Invest Is Through Portfolios
Stocks can jump or crash but long term success comes from staying invested. The right portfolio helps you ride gains and cushion single stock drops
The Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has a track record of comfortably outperforming its benchmark that includes all 3 – the S&P 500, S&P mid-cap, and Russell 2000 indices. 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.