Despite a more than 60% rise since the March lows of this year, at the current price of $63 per share, we believe Applied Materials stock (NASDAQ: AMAT) is still a good opportunity for investors. AMAT stock has increased from $38 to $63 off the recent bottom, a little more than the S&P which increased by 54% from its recent lows. However, the stock is only 3% above the level it was at the start of the year, and is still 7% lower than its pre-Covid (February 2020) high of $68. We believe that AMAT’s stock could set fresh highs, rising over 15% from its current level, driven by expectations of rising demand and strong Q3 2020 results. Our dashboard What Factors Drove 97% Change In Applied Materials Stock Between 2018 And Now? has the underlying numbers behind our thinking.
The sharp stock price rise since 2018 end came despite a 13% drop in revenue, which translated into a 11% drop in net income. On a per share basis, earnings decreased from $3.00 in 2018 to $2.89 in 2019.
Revenue and net income dropped in 2019 due to the semiconductor supply glut that drove down demand and selling prices. Demand started picking up at the start of 2019 and despite the pandemic, results for the most recent quarter (Q3 2020) saw revenue come in at $4.4 billion vs $3.56 billion for the same period in 2019, a 24% jump.
Applied Materials’ P/E multiple rose from 11x at the end of 2018 to 21x by the end of 2019 mainly due to strong investor expectations as demand rose and the supply glut started clearing out. The P/E multiple has risen further to 22x so far this year. We believe that the company’s P/E ratio has the potential to see a slight increase in the near term on expectations of further demand growth and favorable shareholder return policy, thus driving the stock price higher.
Where Is The Stock Headed?
The global spread of coronavirus and the resulting lockdowns in early 2020 affected semiconductor demand and manufacturing during Q2. However, Applied Materials announced strong Q3 earnings, with revenue at $4.4 billion vs $3.56 billion for the same period in 2019, a 24% jump. A drop in operating expenses as a % of revenue saw operating margins rise from 22.5% to 25.2%. Further, the effective tax rate dropped from 27% to 19.1% and this pushed net income up from $571 million to $841 million, and EPS grew 1.5x YoY from $0.61 to $0.92. Additionally, with the lockdowns being lifted and manufacturing capacity stepping up to pre-Covid levels, we believe the company will see further revenue and margin growth in the medium term.
Applied Materials has also been helped by rising TV sales during the past few months as demand for in-house entertainment rose sharply due to quarantine, and this is expected to continue in the near-term, driving AMAT’s display revenues higher. These factors will raise investor expectations further, driving up the company’s P/E multiple. We believe that Applied Materials’ stock can rise a further 15% from current levels, to set fresh highs over $70.
What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.
See all Trefis Price Estimates and Download Trefis Data here
What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.