Analysts Still Want Double-Digit Upside Out of Applied Materials

Key Points

• Applied Materials stock has changed slightly after reporting its first quarter of 2024 earnings results.
• Analysts still see the company's double-digit upside and EPS growth as its primary customers are taking over the industry.
• Price action gave Applied Materials all the hype, yet its valuation shows a steep discount to peers.

Investors may have noticed a recent hype surrounding technology stocks, with a particular niche calling for additional attention. Those in the semiconductor industry responsible for making all of artificial intelligence’s promises today have seen preferential treatment from the markets and Wall Street analysts. However, not all stocks in this space are created equal. 

Shares of Applied Materials Inc. NASDAQ: AMAT have changed a little this week, as investors are likely looking to take a breather after the stock rallied by as much as 37.3% in the past six months. While some investors may be squirming to take some profits off the table, especially after disappointing Federal Reserve (the Fed) timetables regarding interest rate cuts, that is far from what portfolios may need today. 

A better medicine can be found in picking some of these stocks that have yet to see the valuation expansions others experienced. Nvidia Co. NASDAQ: NVDA and Advanced Micro Devices Inc. NASDAQ: AMD saw their market capitalizations more than double in the past year. Yet, Applied Materials’ valuations show that it could have a 25% leg to push higher. 

The Economy Needs Applied Materials to Stay

As the U.S. government pushes its plan to onshore semiconductor manufacturing, decreasing the world’s exposure to Asian regions, where Taiwan Semiconductor Manufacturing Company Ltd. NYSE: TSM reigns king as one of the world’s leading provider of chips, Applied Materials could see more significant growth than is expected.

Taiwan Semiconductor recently received a $12 billion grant from the U.S., which will help the company build out its necessary factories to diversify the semiconductor supply chain. The supply chain was severely disrupted during COVID-19, causing shortages in every consumer electronic product. 

Others are hopping on this bandwagon, with Intel Co. NASDAQ: INTC and even Samsung Electronics Co. OTCMKTS: SSNLF receiving a few billion themselves to start building manufacturing infrastructure in the U.S.

The keyword here is manufacturing, as in the manufacturing sector itself. Analysts at The Goldman Sachs Group Inc. expect to see a breakout in the industry throughout 2024, a thesis investors can find in the bank’s 2024 macro outlook report. 

Because the Fed is looking to cut interest rates this year, leading to a weaker dollar, American goods could become more attractive in the eyes of foreign buyers. February’s ISM manufacturing PMI index posted a 6.4% bump in export orders; it looks like Goldman’s thesis is correct. 

Bringing a fundamental reason to stay within manufacturing stocks and an even more significant global trend in artificial intelligence, it is time for investors to find out why Applied Materials is a top candidate on this list. 

Don’t be Fooled by The Quarter

Flat revenue, that’s what the company’s press release says about the first quarter of 2024. Though an 11% boost in earnings per share (EPS) shows the business’s operations are becoming more efficient – and profitable – despite seeing no material increase in the top-line.

This is because of the easing supply chains in the semiconductor space, helping improve pricing power for companies like Taiwan Semiconductor Manufacturing and Samsung, which are top customers for Applied Materials.

If the world wants more advancements in AI. That’s good for Taiwan Semiconductor’s business, which is also suitable for Applied Materials. Moving past this obvious economic fact, here’s where investors can get some extra juice to squeeze.

Analysts at Cantor Fitzgerald saw it fit to slap a $260 price target on Applied Materials, calling for up to 21.5% upside from where the stock trades today. Following this trend, UBS analysts pushed for $235 a share, or roughly 10% above today’s price. 

Compared to Advanced Micro Devices, which trades at 72% of its 52-week high, Nvidia stock reached 97% of its 52-week high, showing investors how winners will always attract bullish traders to bid them higher. 

As an extension to Nvidia’s price action, Applied Materials is flirting with making new all-time highs, but wait, there’s more. Compared to the computer sector’s 265.2x P/E multiple, Applied Materials stock trades at 25.2x to bring a discount of 90% to the industry. 

The so-called 'smart money' took notice, which could be one reason behind the $128.4 billion of institutional inflows into Applied Materials stock over the past 12 months. These institutions could be looking to close the stock's massive valuation gaps.