Applied Materials, Inc. (AMAT)

Equity
US
Technology

RISK

RETURN

Key risk factors

Good trading liquidity

Limited default risk

Modest price volatility

Key return factors

Very strong margins and returns

Favourable price performance

Overvalued vs peers

Company profileApplied Materials, Inc. provides manufacturing equipment, services, and software to the semiconductor, display, and related industries. It operates through three segments: Semiconductor Systems, Applied Global Services, and Display and Adjacent Markets. The Semiconductor Systems segment develops, manufactures, and sells various manufacturing equipment that is used to fabricate semiconductor chips or integrated circuits. This segment also offers various technologies, including epitaxy, ion implantation, oxidation/nitridation, rapid thermal processing, physical vapor deposition, chemical vapor deposition, chemical mechanical planarization, electrochemical deposition, atomic layer deposition, etching, and selective deposition and removal, as well as metrology and inspection tools. The Applied Global Services segment provides integrated solutions to optimize equipment and fab performance and productivity comprising spares, upgrades, services, remanufactured earlier generation equipment, and factory automation software for semiconductor, display, and other products. The Display and Adjacent Markets segment offers products for manufacturing liquid crystal displays; organic light-emitting diodes; and other display technologies for TVs, monitors, laptops, personal computers, electronic tablets, smart phones, and other consumer-oriented devices. The company operates in the United States, China, Korea, Taiwan, Japan, Southeast Asia, and Europe. Applied Materials, Inc. was incorporated in 1967 and is headquartered in Santa Clara, California.

Valuation: Overvalued

Multiple

TTM

NTM

P/E

25.10

25.90

PEG

1.50

P/B

10.10

7.30

P/S

6.90

6.80

P/FCF

27.00

37.10

EV/EBITDA

21.60

22.30

Considering past and projected metrics, the stock is 'expensive' compared to its peers. Specifically, the stock is fairly valued on P/E, neutral on EV/EBITDA, and overpriced on P/FCF.

Performance: Favourable

Over the past six months, the stock has consistently climbed, resulting in 47% total increase. When compared to its international counterparts in the same sector and industry (as shown above), the stock has exceeded their performances, leading by 43ppts in total. This is equally valid for peers from the same country and industry. Given the stock's valuation versus its peers, its total price movement is favourable. This generally signifies that a stock is fairly valued or marginally undervalued abd is becoming more 'expensive', suggesting a short-term spike in confidence by the market at large.

Analyst view: Neutral

The average target price is 215 and suggests 3% downside potential. Usually, this means a SELL recommendation among investment firms, or a recommendation to decrease one's position in this instrument in the next 12 months. The most optimistic analyst has a target price of 260.0. This translates into 18% upside potential in the best case. On the other hand, the most pessimistic analyst has a target price of 143.1. This is equivalent to 35% downside potential in the worst case.

Profitability: Very strong

RoE

Applied Materials, Inc. reported a return on equity (RoE) of 43.5% in the last 12 months, down from 49.2% in FY23. The market consensus projects an RoE of 35.4% in FY24, again ahead of its peers.

RoA

Another important profitability metric, return on assets (RoA), amounted to 24.4% in the last 12 months, a decrease from 25.5% in FY23. The market analysts predict that RoA will be 19.5% in FY24, again stronger than its peers.

RoCE

In the last 12 months, the return on capital employed (RoCE) declined to 31.3%, above the peers. The consensus estimate for FY24 for RoCE is 28.1%, again ahead of the peers.

Net margin

EBITDA margin

Historically, AMAT has reported very strong net margins compared to its global peers. Specifically, in the last 12 months, this metric equalled 28.9%, a growth from 28.5% in FY23. The company has reported good EBITDA margins compared to its global peers in recent years. EBITDA margin amounted to 32.8% in the last 12 months, a decline from 33.0% in FY23.

RoIC / WACC = 3.4(excellent value creation)

The ratio of return on invested capital (RoIC) to the weighted average cost of capital (WACC) has been 3.4 in the past several years. This ratio implies a excellent shareholder value creation.

Growth: Average

Revenue

EBITDA

EPS

Free cash flow

AMAT reported revenue of USD 26 501mn in the last 12 months, up 0% from FY23. The dynamics of cash flow, as measure by free cash flow (FCF), were rather similar. EPS grew 2% from FY23 to USD 8.76. Market expects EPS to reach USD 8.48288 in FY24.Revenue growth has been constrained in the past several years (negative-to-neutral), while EBITDA growth has been steady. This all contributed to continued EPS growth (positive-to-neutral). FCF has grown rapidly, much better than EBITDA. We emphasize the highly volatile dynamics of EBITDA, EPS and FCF.

Dividends: Reasonable

Dividend paid

Dividend yield

The company has a track record of regular dividend payments. It has paid dividends in each of the past ten years. Dividend per share (DPS) has grown yearly, and there is an evident trend. In the past 12 months, the dividend yield has been low and below its peers. On average, the company pays dividends quarterly, which may appeal to investors valuing a regular income stream.

Default risk: Limited

The risk of default is minimal. We note robust profitability, solid return on capital, strong debt servicing capacity, adequate interest coverage, solid cash flow generation, and an favourable capital structure, among the positive credit factors. Among the negative credit factors, we point to slow historical revenue growth, excessive margin volatility, and poor working capital management.

Volatility: Modest

In normal market circumstances, AMAT is as volatile as an index. Put differently, without outstanding market volatility or shocking company news, the stock's price will move with the index. The stock's losses on its worst days (less than 1-5% of the time) will range from moderate to average.

Stress-test: Average

In highly turbulent market conditions, AMAT is moderately volatile. In other words, the stock will fall more than the index in times of extreme market volatility or shocking company news. Standalone, the worst-day losses (less than 1% of the time) will likely be moderate.

Selling difficulty: Low

AMAT boasts high trading liquidity. The average private investor can sell his common position in the stock immediately. Liquidity is usually very stable and remains favourable on the days with the lowest activity. The trading volume mostly stays the same even under highly turbulent market conditions.

Country risk: Very low

The institutional, legal, and compliance risks associated with the company's country are minimal. In combination with stringent business standards, shareholder rights are very highly protected.

Other risks: Negligible

No other major risks have been identified.