Why Applied Materials Stock Soared 6%

Applied Materials stock (NASDAQ:AMAT) gained almost 6% in Thursday’s trading and remains up by about 22% year-to-date.  In comparison, Applied’s semiconductor industry peer Texas Instruments stock (NASDAQ:TXN) has gained about 24% over the same period. So what are some of the trends driving Applied Materials stock’s recent gains?

The Fed cut interest rates by 50 basis points on Wednesday, marking the first rate cut in close to four years.  With the current benchmark federal funds rate standing at 4.75% to 5% post the cut, there also remains room for the central bank to lower interest rates further. As a major supplier of highly specialized semiconductor fabrication equipment, Applied Materials is dependent on the capital spending cycle of major chipmakers such as TSMC and Samsung. Now lower interest rates effectively reduce borrowing costs for manufacturers and make larger projects more viable. This in turn could drive up demand for the equipment that Applied supplies. Moreover, lower rates are also generally beneficial to growth stocks such as technology, which have higher earning potential in outer years.

Interest rate cuts aside, the semiconductor cycle appears to be on the upswing. While last year was challenging for Applied Materials due to weakened capital spending post-COVID, conditions are improving. The company’s Q3 2024 results exceeded expectations, with 5% year-over-year revenue growth to $6.8 billion and earnings of $2.12 per share. The semiconductor downcycle appears to have bottomed out as memory prices stabilize amid slower supply growth and strong demand. Additionally, PC sales are projected to recover this year after nearly double-digit declines in 2023.

Moreover, the industry is seeing robust 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, offering tools and services that span materials engineering, process control, and integration. Nvidia has been the hottest of the AI stocks. But did you know there is a lesser-known AI name could offer more upside than Nvidia?

Looking for more companies that can benefit from increased digitization and AI deployment? See our analysis of Internet Infrastructure Stocks

Now the increase in AMAT stock over the last 3-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 84% in 2021, -38% in 2022, and 68% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it 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 around rate cuts and multiple wars, 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 $197 per share. Applied stands to benefit from potentially higher orders and a rising mix of higher-end equipment driven by applications such as AI and the shift to more advanced process technologies. This is also driving the company’s margins higher. 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. We value Applied Materials stock at $222 per share, about 10% 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.

While investors have their fingers crossed for a soft landing by the U.S. economy following the start of the Fed’s monetary easing cycle, how bad can things get if there is another recession? Our dashboard How Low Can Stocks Go During A Market Crash captures how key stocks fared during and after the last six market crashes.

[1] Returns as of 9/20/2024
[2] Cumulative total returns since the end of 2016

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