Applied Materials’ (NASDAQ: AMAT) stock has risen almost 3x over the past 4 years from $16.10 in August 2015 to $47.50 in August 2019. This rise was primarily driven by a sharp increase in revenue and net income margin, along with a drop in shares outstanding, which has pushed up earnings per share. We expect this growth to slow down going into late 2019, with a decrease in display and memory unit demand.
View our interactive dashboard analysis Applied Materials: Why did the stock grow 3x in 4 years?
We break down the change in Applied Materials’ stock into 4 factors: Stock Price = (Revenue x Margins / No. of Shares) x P/E Multiple
A] Growth in Applied Materials’ Revenue has been driven by huge demand growth and increasing memory prices
- Applied Materials’ revenue has grown 78.6% from 2015-2018, but we expect numbers to weaken in 2019, on the back of trade tensions and falling demand.
- Revenue from their semiconductor equipment division has been a key driver, owing to higher spending by semiconductor manufacturers trying to capitalize on the rise in memory prices.
- Revenue from their display division has also seen consistent growth on the back of growing demand for OLED displays and flat panels used in large format TVs.
- However, we estimate a drop in revenue for 2019, amidst ongoing trade tensions, along with falling memory prices and weakening demand in the TV space.
B] Net Income Margin has grown from 14.3% in 2015 to 19.2% in 2018, and we expect it to further grow to 21.8% in 2019
- The sharp increase in net income margins, is largely due to improving profit margins from the company’s display and semiconductor divisions.
- We expect net income margins to grow to 21.8% for 2019, even with decreasing revenue, as the company is expected to cut down on the high R&D and marketing costs from the previous 2 years, on the back of slowing demand.
C] How has Applied Material’s P/E multiple compared to that of its peers?
- Applied Materials’ P/E multiple momentarily rose to 21.3 in 2016, over a strong demand outlook at the time, both in the memory chip and display divisions.
- The P/E multiple has fallen back down to the 14.5-15.5 range, on the back of trade tensions and lower demand expected to affect business.
- Lam Research has somewhat followed a similar trend, whereas KLA Tencor’s earnings multiple has surged over 2018-2019.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.