While the semiconductor chip shortage and supply chain issues exacerbated by rising COVID-19 cases in China and the Russia-Ukraine war are impacting the industry, the robust demand from the automotive and electronics industries has allowed companies to raise prices for their chips and generate substantial profits. Moreover, the passage of the $52 billion CHIPS Act is likely to strengthen domestic semiconductor manufacturing and research. According to BlueWeave consulting, the global semiconductor market is estimated to grow at a CAGR of 5.2% between 2022 and 2028. Therefore, both Applied Materials, Inc. (AMAT) and Lam Research Corporation (LRCX) should benefit.
AMAT provides manufacturing equipment, services, and software to the semiconductor, display, and related industries. It operates through three segments: Semiconductor Systems; Applied Global Services; and Display and Adjacent Markets.
LRCX designs, manufactures, markets, refurbishes, and services semiconductor processing equipment to fabricate integrated circuits. The company offers ALTUS systems, SABRE electrochemical deposition products, and SOLA ultraviolet thermal processing products.
Which of these two stocks is a better buy now? Let’s find out.
Click here to checkout our Semiconductor Industry Report for 2022
Latest Developments
On March 11, 2022, AMAT announced that its Board of Directors had approved a new $6 billion share repurchase authorization, supplementing the previous approval, which had $3.20 billion remaining at the end of the first quarter of fiscal 2022. In addition, the Board approved an 8.3% increase in the quarterly cash dividend from $0.24 to $0.26 per share, marking the fifth consecutive annual dividend increase.
On April 20, 2022, Tim Archer, LRCX’s President, and CEO, said, “We are focused on resolving our supply issues as quickly as possible to support strong customer demand. We remain confident in the secular drivers of wafer fabrication equipment investment as well as Lam's leadership position and expect to return to solid growth as industry constraints ease.”
Recent Financial Results
AMAT’s revenues increased 21% year-over-year to $6.27 billion for the fiscal first quarter ended January 30, 2021. The company’s non-GAAP net income came in at $1.70 billion, representing a 32% year-over-year increase. Also, its non-GAAP EPS came in at $1.89, up 36% year-over-year.
LRCX’s revenues increased 5.5% year-over-year to $4.06 billion for the fiscal quarter ended March 27, 2022. However, its net income came in at $1.02 billion, representing a 4.6% year-over-year decrease. Also, its EPS came in at $7.30, down 1.5% year-over-year.
Past and Expected Financial Performance
AMAT’s net income and total assets grew at CAGRs of 21.6% and 10.4%, respectively, over the past three years. Analysts expect AMAT’s revenue to increase 15.1% in the current year and 10.1% next year. The company’s EPS is expected to grow 18.4% in the current year and 14.8% next year. Moreover, its EPS is expected to grow at a rate of 15.7% per annum over the next five years.
On the other hand, LRCX’s net income and total assets grew at CAGRs of 19.4% and 8.8%, respectively, over the past three years. The company’s revenue is expected to increase 15.1% in the current year and 15.9% next year. Its EPS is expected to grow 16.2% in the current year and 19.9% next year. Also, LRCX’s EPS is expected to grow at a rate of 13.9% per annum over the next five years.
Profitability
AMAT’s trailing-12-month revenue is 1.44 times what LRCX generates. AMAT is also more profitable, with a gross profit margin and levered FCF margin of 47.67% and 17.35% compared to LRCX’s 45.93% and 15.46%, respectively.
However, LRCX’s ROE, ROA, and ROTC of 79.68%, 20.46%, and 29.35% are higher than AMAT’s 56.07%, 19.91%, and 27.87%, respectively.
Valuation
In terms of forward non-GAAP P/E, LRCX is currently trading at 14.08x, higher than AMAT’s 13.02x. Moreover, LRCX’s forward EV/EBITDA ratio of 12.16x is higher than AMAT’s 11.38x.
So, AMAT is relatively affordable here.
POWR Ratings
AMAT has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. On the other hand, LRCX has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Of the 96 stocks in the B-rated Semiconductor & Wireless Chip industry, AMAT is ranked #32. In comparison, LRCX is ranked #65.
Beyond what I’ve stated above, we have also rated the stocks for Quality, Value, Growth, Momentum, Stability, and Sentiment. Click here to view all the AMAT ratings. Also, get all the LRCX ratings here.
The Winner
The semiconductor space is booming with rising demand for advanced technologies. While both AMAT and LRCX are expected to gain, it is better to bet on AMAT because of its robust financials, lower valuation, higher profit margin, and better growth prospects.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Semiconductor & Wireless Chip industry here.
AMAT shares were trading at $106.92 per share on Tuesday afternoon, up $1.17 (+1.11%). Year-to-date, AMAT has declined -31.93%, versus a -15.75% rise in the benchmark S&P 500 index during the same period.
About the Author: Nimesh Jaiswal
Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.
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