The recent 6.4% surge in the stock of leading semiconductor equipment supplier Applied Materials (NASDAQ: AMAT) to all-time highs around $200 after the first fiscal quarter earnings report has left investors pondering a crucial question. Is it still wise to invest in this stock, considering the soaring valuation?
Steady Amidst Volatility: A Diversified “Arms Dealer” to Semis and AI
Although often perceived as highly cyclical, Applied has demonstrated a surprising degree of resilience post the pandemic upheaval. The company’s broad product portfolio spans critical etch and deposition manufacturing steps, alongside metrology, inspection, and packaging equipment.
Notably, during the downturn in leading-edge chips and memory, Applied managed to sustain healthy earnings per share throughout 2022 and 2023, contrasting the substantial profit declines experienced by some peers. The disconnect between stock performance and mild profit declines in the past year underscores the underestimation of Applied’s potential, making the current surge understandable.
Redefining Success: Revenue Dips, Stock Soars
Despite a drop in revenue during the fiscal fourth quarter, Applied exceeded market expectations. Additionally, adjusted earnings per share witnessed a 5% increase, primarily ascribed to its robust margin management and continued stock buyback strategy. The stock’s remarkable surge can be attributed to a broader investor sentiment of an impending semiconductor recovery, bolstered by signs of rebound in the PC and smartphone industries post-pandemic.
Market Confidence in Technological “Inflections”
Applied’s leadership in crucial technology “inflections” coupled with its anticipatory market strategies has garnered significant investor confidence. The company’s adeptness in new transistor structures including gate-all-around (GAA) and backside power, as well as its advancements in advanced packaging, positions it for substantial market share growth.
Management’s bullish $1 billion opportunity forecast for every 100,000 wafer starts per month reflects market domination aspirations. Moreover, Applied’s success in high-bandwidth memory (HBM) and its potential in the AI ecosystem add to the overall positive outlook for the company’s future prospects.
Strategic Gains in Growth Areas
Applied’s diverse exposure across various industry segments has not only allowed it to predict industry trends but to also integrate technologies that other specialists may struggle to achieve. As the semiconductor industry enters an upward cycle and with speculative potential surrounding AI, investing in Applied Materials, even at its all-time high, presents a compelling proposition.
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William Duberstein has positions in Applied Materials. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Applied Materials. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
