Applied Materials on the Rise: Can It Keep Up with the AI Boom?

Applied Materials (NASDAQ:AMAT) stock has shown strong performance this year, climbing approximately 14% year-to-date. In comparison, its competitor Texas Instruments (NASDAQ:TXN) has seen a notable 21% increase during the same period. As Applied prepares to announce its Q4 FY’24 earnings around November 15, estimates suggest the company will report earnings of about $2.20 per share, up from $2.12 in the previous year. Revenues are projected to reach around $7 billion, marking a 3% growth year-over-year. For further insights, see our detailed Applied Materials Earnings Preview.

Last year, Applied Materials faced obstacles due to reduced capital spending in the aftermath of Covid-19. However, conditions seem to be improving this fiscal year. In Q3 FY’24, the company achieved a 5% year-over-year revenue increase, totaling $6.8 billion, alongside earnings of $2.12 per share, which exceeded expectations. Signs indicate that the semiconductor downcycle is stabilizing, with a recovery in logic chip demand and increasing GPU needs from data centers. Additionally, the memory sector is transitioning to advanced high-bandwidth memory due to significant demand from AI applications. Applied Materials is well-positioned for this change, providing essential tools and services in materials engineering, process control, and system integration.

The rise in demand for AI chip production, coupled with a shift towards advanced manufacturing technologies, positions Applied to secure more orders and increase its profit margins. Notably, Q3 gross margins improved by 100 basis points year-over-year to 47.3%. Analysts anticipate that similar trends will continue into Q4. While Nvidia has dominated the AI stock conversation, less recognized companies may present even greater upside potential.

Applied’s stock performance over the last four years has not been stable, as its annual returns often displayed greater volatility than the S&P 500. Returns for AMAT showed an impressive 84% in 2021, a steep decline of 38% in 2022, and a rebound of 68% in 2023. By contrast, the Trefis High Quality (HQ) Portfolio, consisting of 30 carefully selected stocks, has shown considerably less volatility and has outperformed the S&P 500 every year during the same timeframe. This consistent performance raises the question: Why do HQ Portfolio stocks deliver better returns with lowered risk, avoiding the cyclical highs and lows experienced by AMAT?

As uncertainty looms in the macroeconomic landscape with concerns about potential rate cuts and global conflicts, will AMAT repeat its underperformance from 2022, or will it see a significant rebound in the coming year?

In addition to rising demand for AI chips, Applied is poised to benefit from recent changes in U.S. monetary policy, particularly following the Federal Reserve’s rate cuts. As a primary provider of specialized semiconductor fabrication equipment, Applied Materials relies heavily on the capital expenditure cycles of major chip manufacturers like TSMC and Samsung. Lower interest rates reduce borrowing costs for these manufacturers, making significant projects more feasible and potentially increasing demand for the high-end equipment supplied by Applied. Currently, AMAT stock trades at roughly $180 per share, while we project its value at $222 per share, presenting a potential upside of about 20% compared to its market price. For additional insights, refer to our analysis on Applied Materials Valuation, including a scenario where the stock could possibly surge to $350.

As investors hope for a smooth transition for the U.S. economy amidst the Fed’s monetary easing, one can’t help but wonder how Applied Materials would fare should another recession occur. Our dashboard entitled How Low Can Stocks Go During A Market Crash highlights how key stocks performed during and after the past six market downturns.

[1] Returns as of 10/18/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.