Share price of Applied materials (NASDAQ: AMAT) have fallen nearly 8% since the stock’s rating was downgraded from buy to neutral by research firm New Street Research in late September. As New Street reaffirmed its target of a $ 140 share price, it cited the lack of short-term catalysts as the reason for the downgrade.
This appears to have shaken investor confidence in the Applied Materials stock, which has largely beaten the wider market so far in 2021 thanks to a series of impressive quarterly results driven by growing demand for semi-finished manufacturing equipment. -conductors.
However, investors should remember that the outlook for Applied Materials hasn’t changed overnight, and it’s still one of the best ways to take advantage of the growing demand for semiconductors across the world. world. Let’s take a look at why buying Applied Materials on its last dip might turn out to be a wise long-term investment decision.
Applied Materials relies on sustainable catalysts
The world is facing a semiconductor shortage as the demand for chips has increased dramatically since last year. For example, Apple faces a component shortage that limits production of the iPhone 13, while Nvidia and Advanced micro-systems have struggled since last year to manufacture enough graphics cards to meet gamer demand. Sony and Microsoft, meanwhile, have not been able to meet demand for their latest game consoles due to the shortage of chips.
Unsurprisingly, semiconductor foundries have jumped into action and are spending billions of dollars to modernize and expand their production lines. As a result, capital spending on semiconductors is expected to increase 13% in 2021 to reach $ 127 billion according to a third-party estimate.
Industry association SEMI believes that increased capital spending will lead to a massive increase in sales of semiconductor manufacturing equipment this year. About $ 95 billion in semiconductor manufacturing equipment is expected to be sold in 2021, which would be a 34% increase from last year. In 2022, SEMI predicts spending on chip manufacturing equipment could reach $ 100 billion.
Thus, the industry in which Applied Materials operates shows no signs of slowing down in the near term. Moreover, the global thirst for chips is not going to slow down, even in the long term, given the increase in semiconductor content in a wide range of applications.
For example, an electric vehicle would have to contain $ 2,000 in chips, compared to $ 500 in semiconductors in an internal combustion engine vehicle. Chip content in data center servers is expected to double to $ 5,600 in 2025, from $ 2,810 last year. Chip volumes in 5G smartphones have doubled compared to 4G devices.
All of this indicates that the strong demand for semiconductors is here to stay for the long term. Applied Materials estimates that the semiconductor industry could add $ 400 billion in revenue from 2024 to 2030. For comparison, the semiconductor industry added $ 200 billion in revenue from 2000 to 2017, and it is on track to record an additional $ 200 billion in sales by 2024.
So the next $ 400 billion in semiconductor revenue will arrive at a much faster rate. This should pave the way for continued growth at Applied Materials as foundries will need to expand their production capacities to meet booming demand.
Offering huge growth at a cheap valuation
The boom in semiconductor investments has resulted in tremendous growth in sales and results for Applied Materials. The company’s revenue in the third quarter of fiscal 2021 for the three months ending August 1, 2021, jumped 41% year-over-year to a record $ 6.2 billion. Applied Materials also reported record adjusted earnings of $ 1.90 per share for the quarter, up 79% from the prior year period.
The company’s outlook for $ 6.33 billion in revenue this quarter would translate to a 35% year-over-year increase from $ 4.69 billion in the fourth quarter of the year. fiscal year 2020. This clearly shows that Applied Materials is not going to run out of steam in the short term. More importantly, the company’s long-term forecast points to sustained growth.
Applied Materials expects to generate $ 26.7 billion in revenue in fiscal 2024 in a baseline scenario, which could reach $ 31 billion in the best-case scenario. The company generated $ 17.2 billion in revenue in the prior year, which means its revenue could grow at a compound annual growth rate (CAGR) of nearly 16% in the best of times. case. Even in the baseline scenario, Applied Materials can reach a CAGR of 11.6%.
Meanwhile, the company expects earnings to double in the baseline scenario to $ 8.50 per share in fiscal 2024, from $ 4.17 per share in fiscal 2020. As such, Applied Materials has all the makings of a growth stock, and the company’s valuation should give investors a good reason to buy it right away.
Applied Materials is trading at 22 times sliding earnings and shows a forward earnings multiple of just 16. These multiples tell us that the stock is trading at a nice discount to the. S&P 500, which has a price-to-earnings ratio of 30. That’s why investors looking to buy a fast-growing company at a cheap valuation should consider taking advantage of the latest drop in Applied Materials and buying more shares to take advantage of the semiconductor boom.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.