What’s Happening With Applied Materials Stock?

Applied Materials (NASDAQ:AMAT) stock has had a solid year thus far, rising by about 30% year-to-date. In comparison, Applied’s semiconductor industry peer Texas Instruments stock (NASDAQ:TXN) has gained about 19% over the same period. So what are some of the trends driving Applied stock’s run-up?

Last year was somewhat challenging for Applied, as semiconductor capital spending weakened following the end of Covid-19 lockdowns. However, things appear to be getting better. Applied recently reported better-than-expected Q3 2024 results, with revenue growing 5% year-over-year to $6.8 billion, and earnings coming in at $2.12 per share. The semiconductor downcycle appears to have bottomed out, with memory prices stabilizing due to slower supply growth and strong demand. Meanwhile, PC sales are expected to recover this year after experiencing nearly double-digit declines in 2023.

Additionally, the industry is seeing strong demand from the artificial intelligence (AI) sector. AI workloads require significant computational power, higher memory capacity, and more complex chips, which need advanced manufacturing processes. AI also requires high-bandwidth memory and sophisticated chip packaging, areas where Applied Materials is well-positioned. The company is diversified across the semiconductor production value chain, offering tools and services that span materials engineering, process control, and integration.

Applied’s focus on cutting-edge technologies is also boosting its margins, with gross margins at 47.3% in Q1—an increase of 100 basis points from the previous year—and operating margins rising by 70 basis points. This trend could continue going forward as the company focuses on new technologies such as Gate-All-Around (GAA) semiconductor equipment. GAA technology is becoming important as semiconductor manufacturers push toward smaller process nodes (such as 2-nanometer), as presently used FinFET transistor architectures face challenges in terms of power wastage and performance. GAA revenue is projected to reach around $2.5 billion in 2024, with the possibility of doubling by 2025. GAA technology is becoming increasingly important as transistors continue to shrink to sizes below 3 nanometers, enabling lower power consumption and reduced energy and heat waste. This technology is important as the demand for AI applications grows.

AMAT stock has shown strong gains of 140% from levels of $85 in early January 2021 to around $208 now, vs. an increase of about 45% for the S&P 500 over this roughly 3-year period. In comparison, Arista Networks (NYSE:ANET), another company that benefits from generative AI, has seen its stock surge by over 300% over the same period. Arista is a market leader in high-speed networks focused on hyper-scalers and big corporations. Turns out, Arista is part of the 30-stock Trefis High Quality (HQ) Portfolio, which 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. So what’s the outlook like for Applied stock?

Applied Materials stock currently trades at about $207 per share. Applied stands to benefit from a rising mix of higher-end equipment orders driven by applications such as AI and the shift to more advanced process technologies. For Q4 FY’24, Applied is guiding revenue of about $6.93 billion, plus or minus $400 million, while adjusted diluted earnings are projected to be between $2.00 and $2.36 per share. This could represent up to 8.5% growth at the upper end of the guidance range. However, there are risks as well.  The company is likely to face some pressure due to its exposure to China, given that the U.S. has been tightening restrictions on exporting the latest semiconductor technology to China. During Q3 FY’24, Applied’s sales to China rose by 24% to $2.15 billion, accounting for roughly a third of the company’s sales. We value Applied Materials stock at $222 per share, slightly ahead of 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 8/19/2024
[2] Cumulative total returns since the end of 2016

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