Applied Materials is a popular play on the chip shortage. Despite a selloff after the company’s first analysts day in years, Wall Street says the future is bright.
David Paul Morris/Bloomberg
The stock of Applied Materials has soared in the last six months, as investors bet that a world-wide shortage of computer chips spells opportunity for the supplier of semiconductor-fabrication gear. But after the company held its first analysts meeting in four years, on Tuesday, the stock has slid.
In Wednesday morning trading, Applied Materials (ticker: AMAT) stock was off 1.6%, to $137, amid a flat stock market.
In their notes after the virtual meeting, analysts reaffirmed their Buy ratings and said that the company seemed conservative in its earnings guidance, while investor expectations had been high.
Applied Materials guided analysts to earnings per share of about $8.50 a share for the October 2024 fiscal year, when investors were hoping for $9.00, writes RBC Capital Markets analyst Mitch Steves in his Wednesday note. Some investors fear that spending on fabrication gear will peak this year, he says. “We take a more bullish stance,” Steves writes, “and think the cycle will last longer than calendar year 2021.”
The RBC analyst rates Applied Materials stock at Outperform, with a $140 price target that is itself conservative compared with the $150 average among analysts surveyed by FactSet.
Applied Materials told analysts Tuesday that demand for artificial-intelligence-based data analysis will lift the semiconductor market to a trillion dollars a year, by the end of the decade, from half a trillion dollars this year. As the leading supplier of chip-fabrication equipment, with a market share exceeding 20%, the company will capture much of the AI-driven growth in chip-factory capital spending—which could rise from $70 billion globally this year, to $100 billion by mid-decade.
The company’s broad product offering put Applied Materials in the best position to capture market share, writes New Street Research analyst Pierre Ferragu, in his post-meeting note. “From a growth perspective,” he writes, “semicap-equipment market leaders are on a sweet spot.”
The boom in AI computing will require “logic” chips—like microprocessors—and memory chips, writes Stifel’s Patrick Ho. Among capital-equipment suppliers, Applied has the most balance between those chip categories, notes Ho, with its sales split roughly 50/50. He rates the stock at Buy with a price target of $160, based on his forecast for EPS of $6.57 for the fiscal year ending October 2022.
J.P. Morgan’s Harlan Sur has a similarly bullish Overweight rating on Applied Materials. His more moderate price target of $146 a share is based on a 22-times multiple on his forecast for EPS of $6.65 for calendar 2022. That multiple matches the company’s semicap peers, as well as Applied Materials’ forward earnings multiples in past semiconductor-capital spending cycles. Nevertheless, Sur sees Applied as poised to deliver “outsized earnings growth over the next few years.”
A Neutral view of the stock comes from UBS analyst Timothy Arcuri, who stuck to that rating and his $127 stock price target, after Tuesday’s analyst conclave. Arcuri has had a Neutral rating on Applied Materials since the stock traded at $40 last year, but he still predicts that the company will exceed the $8.50 midpoint of its EPS guidance for fiscal 2024. The UBS analyst thinks that semicap rival Lam Research (LRCX) is a better bargain, as it trades at half of Applied Materials’ multiple. Arcuri rates Lam stock at Buy.
Write to Bill Alpert at [email protected]
