Could Applied Materials Stock Surge to $350? Here’s What You Need to Know

Applied Materials stock (NASDAQ:AMAT) could potentially reach $350 in the coming years. Looking back, in late October 2022, the stock hovered near $80. Since then, it has climbed to just over $200 per share. Currently, it trades at 25 times its trailing earnings and about 21 times its projected earnings for 2025, a reasonable valuation considering the company’s consistent earnings growth and solid position within the semiconductor manufacturing equipment market. We analyze Applied Materials’ revenue growth, profit margins, and valuation multiples to illustrate a plausible path toward a $350 stock price.

AI’s Rising Demand Fuels Revenue Growth

The annual revenue for Applied Materials has increased at an average rate of 16% over recent years, and this momentum seems likely to continue. This year, however, sales growth is expected to cool down to around 2%, bringing total revenue to about $27 billion. Looking forward, analysts predict nearly a 12% growth for fiscal year 2025. If Applied can achieve average annual sales growth of approximately 22% over the next three years—driven by the rising need for advanced tools in AI chip production—revenues could skyrocket from $27 billion in fiscal year 2024 to around $49 billion by fiscal year 2027, marking an approximate 81% increase. Several trends are poised to enhance this growth.

As generative artificial intelligence (AI) becomes more prevalent, the demand for semiconductors is skyrocketing. AI applications necessitate powerful computations, higher memory capacity, and more complex chips, requiring advanced manufacturing techniques. Companies like Applied, which offer sophisticated solutions in materials engineering, process control, and integration, stand to benefit. The industry is embracing newer technologies such as gate-all-around transistors and advanced chip packaging that boost chip performance and efficiency for AI tasks. Applied has been proactive in these areas and could capture significant market share as AI adoption grows.

Additionally, last month’s interest rate cuts by the Federal Reserve may serve as a boon for Applied Materials. The Fed reduced rates by 50 basis points in September, the first cut in nearly four years. With the new federal funds rate between 4.75% and 5%, further reductions might be on the horizon. Lower rates typically decrease borrowing costs for manufacturers, enabling them to invest more in capital projects. This might increase the demand for the specialized semiconductor fabrication equipment that Applied, the largest U.S.-based semiconductor equipment provider, supplies.

A History of Strong Performance

Applied Materials has shown considerable growth in recent years, rising from approximately $85 in early 2021 to over $200 today. This growth, however, has not been smooth. The stock has experienced volatility, with returns of 84% in 2021, a decline of 38% in 2022, and a rebound of 68% in 2023. In comparison, the Trefis High Quality (HQ) Portfolio, consisting of 30 stocks, has produced steadier returns and outperformed the S&P 500 each respective year during this period. The HQ Portfolio has managed to provide superior returns while minimizing risk, evident in its performance metrics.

Margin Improvements from Advanced Products

Combining robust revenue growth with improving adjusted net margins—growing from 19.6% in fiscal year 2019 to 25.6% in fiscal year 2023—indicates Applied’s strong position. Higher-end products and effective cost management have contributed to this positive trend. By fiscal year 2027, margins might reach about 31% as the company invests in innovative technologies like Gate-All-Around (GAA) semiconductor equipment. Furthermore, Applied’s faster-growing services sales, which offer recurring revenue and are increasingly focused on lucrative software solutions, can bolster margins as well. Unlike some competitors, Applied has maintained disciplined capital spending, which should also positively impact margins. The combination of around 80% revenue growth alongside a 20% increase in margins suggests earnings could grow by roughly 2.1 times over the next three years.

Strong Performance May Stabilize Earnings Multiples

Even if earnings increase by a factor of 2.1, a simultaneous decline in the price-to-earnings (PE) ratio might occur, decreasing it to about 12.5, provided the stock price remains unchanged. However, investors appear optimistic that such a scenario won’t materialize. If earnings do indeed expand by 2.1 times in the upcoming years, rather than a drop in the PE ratio from approximately 25 to around 12.5, maintaining a PE around 20 seems more plausible. This optimistic outlook could support a rise in AMAT stock to $350 within a few years.

As for the timeline for this potential high-return scenario, while our analysis suggests a three-year path, the actual duration may vary. As long as Applied maintains its trajectory of revenue growth and robust margins, the stock could respond positively over a similar timeframe.

[1] Returns as of 10/14/2024
[2] Cumulative total returns since the end of 2016

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