Continuing Demand Makes Applied Materials a Buy
Applied Materials (NASDAQ:AMAT) will report fourth-quarter earnings after the market closes on November 18. Analysts are forecasting earnings per share of $1.94 on earnings of $6.3 billion. The whisper number suggests the company may beat on earnings to the tune of $1.98 EPS.
Let’s be conservative and use the analysts’ numbers. That would be a year-over-year (YOY) gain of 65% in earnings and 35% in revenue. However, the numbers are a little less exciting on a sequential basis. The 2% growth in earnings and revenue would be the slowest sequential growth this year. After a year in which the company had solid beats quarter over quarter, any sign of slower growth could dampen investor sentiment.
However, if you take the whisper number into account and also factor in a 3% revenue beat (which is inline with the last few quarters) the outlook is better. Under that scenario the company would have a 4% beat in earnings and a 5% beat in revenue. Still lower, but double what is forecast.
It’s important to note that AMAT stock went down slightly after its last earnings report in which it posted sequential growth in earnings of 7%. And when investors consider that AMAT stock is up 17% in the last 30 days prior to earnings, you can understand why there might be some hesitancy. This could explain why the stock has bumped against a level of resistance in the last two weeks.
However, when Applied Materials last reported earnings, it gave no indication that this period of elevated demand would be letting up anytime soon. And if the earnings report from NVIDIA (NASDAQ:NVDA) showed anything it’s that demand for semiconductors is still robust.
A Golden Age For Chip Stocks
Prior to 2016, semiconductor stocks were notoriously cyclical and somewhat boring as an investment. are notoriously cyclical in nature. That changed as excitement built about 5G, the Internet of Things (IoT), cloud computing, artificial intelligence (AI), and more recently electric vehicles and virtual reality. All of these sectors require equipment that is powered by semiconductor chips.
This is creating a super cycle moment and Applied Materials has been a part of this growth from the beginning. From Oct. 30, 2015 through Dec. 31, 2019, AMAT stock climbed 263%.
That rally was interrupted by the uncertainty brought on by the Covid-19 pandemic. The stock price was nearly cut in half. However, since that point, AMAT stock is up over 300%.
where demand is likely to stay strong throughout 2022. And as a supplier of the materials that chipmakers rely on to make their chips, Applied Materials is an ideal play on this red-hot sector.
The Metrics Support Buying AMAT Stock
After watching AMAT stock climb 18% between Oct. 26 and Nov. 9, it’s understandable to believe the rally is over. Applied Materials is now slightly below its 52-week high and the relative strength indicator is getting close to putting the stock in overbought territory.
However, the stock still maintains a very attractive price-to-earnings ratio of 27.55. This is below both the P/E average for the tech-heavy NASDAQ 100 index. And on Nov. 11, an analyst from Wells Fargo maintained its Overweight rating for AMAT stock and raised its price target to $175.
This bullish outlook was affirmed by Jake Wujastyk, chief marketing analyst at TrendSpider who sees shares bouncing off a large volume shelf. Wujastyk remarked:
“AMAT has a 77% win rate for November and a 67% win rate for December, two of the strongest months of the year...The technicals and seasonality are both aligning for a continued higher move to the 1.618 extension around $165.50.”
We’re of the opinion that other analysts are waiting on Applied Material’s numbers. When they arrive, it’s likely that upgrades will abound. Therefore, we recommend buying AMAT stock while it’s still at a discount.