What’s New With Applied Materials Stock?

Applied Materials stock (NASDAQ:AMAT) gained almost 10% over the past month and remains up by about 30% year-to-date.  In comparison, Applied’s semiconductor industry peer Texas Instruments stock (NASDAQ:TXN) has gained about 22% this year. Here’s a closer look at some trends driving Applied Materials’ recent gains.

Rate Cuts Can Drive Capex Spending By Chip Companies

The Fed cut interest rates by 50 basis points in September, 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.  Also, check out our analysis of other ways to profit from the Fed’s next move?  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 high-end equipment that Applied – the largest U.S.-based semiconductor equipment maker – supplies. Moreover, lower rates are also generally beneficial to growth sectors such as technology, which have higher earning potential in outer years. Looking for more companies that can benefit from increased digitization and AI deployment? See our analysis of Internet Infrastructure Stocks.

AI Demand, Stronger Logic Chip Market 

Beyond interest rate cuts, the semiconductor industry at large is also stabilizing. Applied Materials faced challenges last year due to reduced capital spending post-Covid-19, but conditions have improved. In Q3 2024, the company reported a 5% year-over-year revenue increase to $6.8 billion and earnings of $2.12 per share, surpassing expectations. 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. The semiconductor downcycle has bottomed out, with logic chip demand recovering alongside the PC market and growing GPU demand from data centers. Meanwhile, the memory market is shifting toward advanced high-bandwidth memory, driven by the AI sector’s robust demand. AI workloads require significant computational power, higher memory capacity, and complex chips that rely on advanced manufacturing processes. Applied Materials is well-positioned in these areas, offering tools and services in materials engineering, process control, and integration. Now Nvidia has been the hottest of the AI stocks. But did you know there is a lesser-known AI name that could offer more upside than Nvidia?

What Lies Ahead For Applied

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 $201 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. Gross margins were up 100 basis points year-over-year to 47.3% in Q3. 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 10/1/2024
[2] Cumulative total returns since the end of 2016

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