To The Moon

Stocks continued to rebound this week, but not all indexes participated equally. The best-performing concepts are internet & direct marketing retails, OLED concept and AI concept.

Considering the different perceptions of the stock, this time TigerPicks chose $Applied Materials(AMAT)$ to have a fundamental highlight to help users understand it better.

Special commend: How to achieve an 8%* annualized yield on your Tiger Vault Fund?

$Applied Materials(AMAT)$

Applied Material's stock has done very well this year rising about 40% YTD. Despite the rise, I believe that there is still room to grow for this high-quality stock. The company has the right combination of growth, safety, and value that should interest investors.

Fabrication Equipment Market is Growing

As the maker of semiconductor manufacturing equipment (i.e., wafer fabrication equipment), Applied Materials is in an ideal position to capitalize on long-term trends of AI and the Internet of Things. These new technologies require more powerful chips with exponential computing power. Chip makers such as $Taiwan Semiconductor Manufacturing(TSM)$ and $Intel(INTC)$ turn to companies like Applied Materials to make all of these possible.

Driven by these two major trends, the company states that the semiconductor industry can reach $1 trillion by 2030. The upcoming era could be the largest in terms of computing power needs. It's no longer just humans that are the major producers of data - but machines have surpassed humans in data generation.

Applied Materials

Applied Materials (Investor Presentation)

Applied Materials

Applied Materials (Investor Presentation)

Applied Materials has a broad portfolio of products in multiple steps of the semiconductor production process. This allows it to continuously push for innovations for its customers either by offering new structures, new materials, or new ways to shrink computer chips. From the company's Q2 2023 earnings call.

At the same time, chip technology complexity is increasing significantly as traditional 2D scaling slows and the industry transitions to a new PPACt playbook to drive improved performance, power, area-cost and time-to-market.

Increasing complexity means that wafer fab equipment can grow at a higher rate than semiconductor revenues and then, within equipment spending, major technology inflections are increasingly enabled by materials engineering, expanding the available market for Applied Materials.

Applied Materials Continues to Innovate

The company has made two important keen advancements in the first half of this year. The first is its Centura Sculpta patterning system which provides an alternative to EUV ("Extreme Ultra-Violet") double patterning.

In gross over-simplification, EUV double patterning entails running the imprinting of chip features twice - therefore increasing feature density. This is a way to get around the resolution limits of EUV. While this is effective it increases the cost of production and adds complexity to the process. Using the Centura Sculpta, manufacturers can "elongate the shapes in any chosen direction to reduce the space between features and increase pattern density".

There are significant cost savings in doing this method since you no longer need to run the EUV twice. This machine could cut into $ASML Holding NV(ASML)$ market a bit as manufacturers would need fewer EUV lithography systems. According to Applied Materials, using Centura Sculpta can produce capital cost savings of approximately $250 million per 100,000 wafer starts.

Applied Materials

Applied Materials (Sculpta Presentation)

The other important product launch this year is the company's new semiconductor wafer fabrication platform called Vistara. According to the company's press release, Vistara is not a "run of the mill" product launch for Applied Materials. The company called it its "most significant new platform" in over a decade, designed after four years of R&D. According to the company website:

Vistara is a modular platform architected on three pillars: flexibility, intelligence, and sustainability. Vistara allows chipmakers to deploy their most complex recipes on a single platform, reduce their operating costs, accelerate time to money, and advance their sustainability initiatives."

Vistara is customizable and is able to use a wide variety of chamber types, sizes, and configurations. It also comes with thousands of sensors that can collect data for future R&D. The platform can lower customer energy costs by 35% and floor space usage by as much as 30%.

Applied Materials

Applied Materials (Vistara Presentation)

It is in these initiatives that I am convinced that Applied Materials can continue to maintain its leading market position as well as potentially outpace the growth of the semiconductor industry.

Financials and Valuation

Looking at the company's historical financials, it can be seen that Applied Materials has been steadily growing its Revenue and EPS for the past 10 years. The company's 5-year and 10-year Revenue CAGR is 9.43% and 13.99%. Its 5-year EPS CAGR of 19.46% is even faster than its revenue growth rate showing that the company's Sales are hitting the bottom line.

Annual Growth Rates

Annual Growth Rates (Seeking Alpha)

Despite these impressive historical results, the company only scored a "D+" in Seeking Alpha's quant rating system. This is because the macroeconomic environment has resulted in a lower Revenue YoY growth rate of only 5.5% in the most recent year. This is much lower than the sector median of 7.5%. However, I believe that the long-term trends are still in favor of Applied Materials. Once the macroeconomic environment begins to stabilize, we could see a return to high growth rates. After all the semiconductor industry is very cyclical and we just happen to be at the bottom of a cycle.

Chart

Data by YCharts

Management is also very shareholder-friendly. In Q3 2023 the company generated $2.58 billion in cash from operations. Out of the cash generated, Applied Materials conducted $439 million worth of share repurchases and distributed $268 million in dividends.

Dividend per share was $0.32 representing a forward dividend yield of 0.92%. Not exactly a great yield, but not unsurprising as AMAT stock nearly doubled from its lows in 2022. The dividend though was increased by 23% compared to last year, so if growth resumes at a rapid rate this could be increased as well.

Applied Materials is currently trading at a P/E Ratio of 18.4x and a forward P/E Ratio of 18x. I believe that this is a reasonable valuation for a high-quality company that is growing at a steady rate. The company is trading at a valuation that is cheaper than its most direct competitors namely ASML and Lam Research (LRCX). ASML is trading at a high valuation of 31x while Lam Research is at 21-22x. AMAT stock is trading at a discount relative to its direct peers.

Chart

Data by YCharts

There is concern that Applied Materials growth is slowing hence the lower valuation relative to its peers. For example, Applied Materials has a YoY Revenue growth of 5.5% and forward revenue growth of 4.33% which is lower than ASML's Revenue growth of 35.6% and forward revenue growth of 11.4%. Lam Research has even worse metrics as its revenue growth YoY was -12.00% with future revenue growth of 0.04%. Therefore I believe that AMAT stock should be trading at least 20-22x (using the same multiple as Lam Research).

Chart

Data by YCharts

The company has also presented somewhat ho-hum guidance for its upcoming earnings call on November 16th. Management expects Revenue to be between $6.1 billion to $6.9 billion in Q4 2023. This is only marginally better than the $6.43 billion reported in Q3 2023. As the macroeconomic situation is still difficult, this guidance is not surprising. Applied Materials expects diluted EPS to be in the range of $1.82 to $2.18.

As mentioned in this article, investing in Applied Materials is all about believing in the long-term trends of AI and IoT. This is especially true once the company starts rolling out next-generation equipment to semiconductor manufacturers. In particular, the Centura Sculpta could eat into ASML's market share if the company's method of elongation instead of double patterning catches on. (You would still need ASML's machine but fewer).

In my view eventually, Applied Materials will return to its long-term growth rate. Assuming a P/E ratio of 20x this could translate to a 25% upside within 3 years.

Stock Price Forecast:

Here are the target price forecasts for the next 12 months from analysts.

The 28 analysts offering 12-month price forecasts for Applied Materials Inc have a median target of 160.00, with a high estimate of 185.00 and a low estimate of 120.00. The median estimate represents a +6.09% increase from the last price of 150.82.

Resource:

https://seekingalpha.com/article/4648206-applied-materials-stock-semiconductor-equipment-maker-continues-excel

What are your thoughts on $Applied Materials(AMAT)$?

Or do you know other companies in the industry?

Please leave your comment below.

🎁Prizes

All Tigers who leave valid comments in the comments section will receive Tiger Coins.