Rallying 30% YTD, What’s Spurring The Rally In Applied Materials’ Stock?

Applied Materials (NASDAQ:AMAT) stock has had a solid year thus far, rising by over 30% year-to-date and outperforming the broader Nasdaq-100 which gained about 11% over the same period. While the company had a mixed 2023, as the broader semiconductor capital spending remained weak as demand for personal computers, laptops, and smartphones eased following the lifting of Covid-19 lockdowns, there are indicators that things are looking up.

The company posted a better-than-expected set of Q1 FY’24 results last month, with revenue coming in roughly flat versus last year at $6.71 billion, and adjusted earnings rising by around 5% to $2.13 per share. Investors likely also believe that the semiconductor downcycle has bottomed out, with memory prices picking up and PC sales poised to improve marginally after declining by nearly double-digit levels in 2023. Separately, the industry is benefiting from a surge in demand from the artificial intelligence space. AI workloads are extremely computationally intensive calling for a higher amount of computing power and memory. Applied stands to gain from higher demand, given that it is well diversified across the semiconductor production value chain, offering tools and services ranging from etching and deposition technologies to inspection, and packaging tools. Besides this, China is increasingly focusing on developing its own semiconductors as it makes technological self-sufficiency a priority. However, Chinese chip makers have still been very dependent on Applied (and other U.S. companies) products and services to make their latest chips. For example, Huawei Technologies and its partner Semiconductor Manufacturing International Corp (SMIC) relied on tech including tools from Applied to make the latest 7-nanometer chip for the flagship Mate 60 Pro smartphone. During Q1 FY’24, sales to China came in at close to $3 billion accounting for about 45% of total revenue, up 17% year-over-year.

AMAT stock has seen extremely strong gains of 145% from levels of $85 in early January 2021 to around $210 now, vs. an increase of about 40% for the S&P 500 over this roughly 3-year period.
However, the increase in AMAT stock has been far from consistent. Returns for the stock were 82% in 2021, -38% in 2022, and 66% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that AMAT underperformed the S&P in 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including MSFT, AAPL, and NVDA, and even for the mega-cap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could AMAT face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

Applied Materials stock currently trades at about $210 per share. This translates into a valuation of about 28x projected FY’24 earnings. Although the multiple is slightly high versus historical levels, we believe the stock is fairly priced. Trends such as generative AI and cloud computing could drive AMAT stock higher. Moreover, Applied has also been looking to expand its revenue streams. Last year, the company expanded into the lithography space, taking on Dutch giant ASML which is best known for its extreme ultraviolet lithography technology. We value Applied Materials stock at $202 per share, which is almost in line with the current market price. See our analysis of Applied Materials Valuation for a closer look at what is driving our price estimate for the stock.

[1] Returns as of 3/25/2024
[2] Cumulative total returns since the end of 2016

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