Is Now the Time to Invest in Applied Materials (AMAT) for Quality Returns?

Applied Materials, Inc. (AMAT), a leading semiconductor equipment provider, reported solid fiscal 2024 second-quarter results. The company posted net revenue of $6.65 billion, exceeding analysts’ estimate of $6.53 billion. Its EPS came in at $2.09 for the quarter, higher than the consensus estimate of $1.99.

During the second quarter, the company introduced a portfolio of new products and solutions designed to cater to the patterning requirements of chips in the “angstrom era.” With the transition to process nodes at 2nm and below, chipmakers increasingly benefit from new materials engineering and metrology techniques.

Gary Dickerson, President and CEO, stated, “Applied Materials continues to deliver strong performance in 2024, with fiscal second quarter revenue and earnings towards the high end of our guided range.”

He added, “Applied Materials has the most enabling portfolio of materials engineering technologies for chips that underpin tectonic shifts in technology including AI, IoT, electric vehicles and clean energy, which puts us in a great position to grow along with these long-term, secular trends.”

On June 13, AMAT’s Board of Directors approved a quarterly cash dividend of $0.40 per share payable on the company’s common stock. The dividend is payable on September 12, 2024, to shareholders of record as of August 22, 2024.

According to the business outlook for the third quarter of fiscal 2024, AMAT expects net revenue to be around $6.65 billion, plus or minus $400 million. Also, the company’s non-GAAP earning per share is expected to be in the range of $1.83 to $2.19.

Shares of AMAT have gained 51.2% over the past six months and 69.7% over the past year to close its last trading session at $237.65.

Let’s look at factors that could influence AMAT’s performance in the upcoming months.

Positive Recent Developments

On February 26, AMAT unveiled a portfolio of new products and solutions designed to cater to the patterning requirements of chips in the “angstrom era.” With the transition to process nodes at 2nm and below, chipmakers increasingly benefit from new materials engineering and metrology techniques.

This helps them overcome EUV and High-NA EUV patterning challenges, including line edge roughness, tip-to-tip spacing limitations, bridge defects, and edge placement errors.

AMAT is also working with various leading-edge logic chipmakers on a growing number of applications for its Sculpta® pattern-shaping technology. It also introduced innovative new etch systems, CVD patterning films, and metrology solutions to complement and improve chips made using EUV and High-NA EUV lithography.

Solid Financials

For the second quarter that ended April 28, 2024, AMAT’s net revenue increased marginally year-over-year to $6.65 billion. Also, its revenue from the Applied Global Services segment increased 7.1% from the prior quarter’s quarter. Its non-GAAP gross profit grew 1.9% year-over-year to $3.16 billion, and its non-GAAP operating income for the same period was $1.93 billion.

Furthermore, the company’s non-GAAP net income and EPS came in at $1.74 billion and $2.09, up 3.1% and 4.5% from the prior year’s quarter, respectively. AMAT’s non-GAAP free cash flow was $1.13 billion for the second quarter.

AMAT’s cash and cash equivalents stood at $7.08 billion as of April 28, 2024, compared to $6.13 billion as of October 29, 2023.

Impressive Historical Growth

AMAT’s revenue grew at a CAGR of 10.2% over the past three years, and its EBITDA improved at a CAGR of 10.2%. Its EBIT increased at a CAGR of 10.5% over the same period, while the company’s net income and EPS grew at respective CAGRs of 18.1% and 21.9% over the same time frame.

In addition, the company’s tangible book value and total assets increased at CAGRs of 19.2% and 9.9% over the same timeframe, respectively.

Favorable Analyst Estimates

Analysts expect AMAT’s revenue for the third quarter (ending July 2024) to come in at $6.67 billion, indicating an increase of 3.8% year-over-year. The consensus EPS estimate of $2.02 for the same period reflects a 6.3% year-over-year improvement. Moreover, the company topped consensus revenue and EPS estimates in all four trailing quarters, which is remarkable.

For the fiscal year (ending October 2024), the company’s revenue and EPS are anticipated to grow 1.6% and 4% year-over-year to $26.94 billion and $8.37, respectively. In addition, Street expects its revenue and EPS for the fiscal year 2025 to grow 11.6% and 15.5% from the prior year to $30.06 billion and $9.67, respectively.

High Profitability

AMAT’s trailing-12-month EBIT margin of 28.87% is 513.4% higher than the 4.71% industry average. Its trailing-12-month net income margin of 27.56% is significantly higher than the industry average of 2.67%. Likewise, the stock’s trailing-12-month levered FCF margin of 17.28% is 70.9% higher than the industry average of 10.11%.

Furthermore, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 45.19%, 21.52%, and 22.86% are favorably compared to the industry averages of 4.11%, 2.61%, and 1.64%, respectively.

POWR Ratings Reflect Promise

AMAT’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, translating to a Buy in our proprietary system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. AMAT has an A grade for Momentum. The stock is trading above its 50-day and 200-day moving averages of $210.09 and $174.04, respectively.

The stock also has a B grade for Sentiment, consistent with its optimistic analyst estimates. AMAT has a B grade for Quality, in sync with its higher profitability relative to its peers.

AMAT is ranked #7 among the 92 stocks in the Semiconductor & Wireless Chip industry.

Beyond what I have stated above, we have also given AMAT grades for Stability, Growth, and Value. Get access to all the AMAT ratings here.

Bottom Line

AMAT reported solid financial results in the last reported quarter. Further, the company’s long-term prospects appear promising, driven by solid demand for semiconductors across several sectors, such as technology, automotive, and healthcare, new innovative product launches, and strategic partnerships and investments.

Given AMAT’s strong market position, impressive financial performance, accelerating profitability, and bright growth outlook, it could be wise to invest in this stock.

How Does Applied Materials, Inc. (AMAT) Stack Up Against Its Peers?

While AMAT has an overall POWR Rating of B, investors could also check out these other stocks within the Semiconductor & Wireless Chip industry with A (Strong Buy) or B (Buy) ratings: Cirrus Logic, Inc. (CRUS), ChipMOS Technologies Inc. ADR (IMOS), and Tower Semiconductor Ltd. (TSEM).

For exploring more A and B-rated chip stocks, click here.

What To Do Next?

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AMAT shares were trading at $236.42 per share on Thursday morning, down $1.23 (-0.52%). Year-to-date, AMAT has gained 46.39%, versus a 14.54% rise in the benchmark S&P 500 index during the same period.

Rajkumari started her career as a writer but gradually shifted her focus to financial journalism, leveraging her educational background in Commerce. Fascinated by the interplay of business and economic shifts in equities, she aspires to evolve as an analyst. With a knack for simplifying complex financial concepts, her mission is to empower investors with insights that lead to profitable decisions.

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