Applied Materials’ (AMAT) Bold Forecast for 2025

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Nvidia may control the lion’s share of AI chip design. But without companies like Applied Materials (AMAT), we’d never see them make it into production.

Foundries like Taiwan Semiconductor rely on Applied Materials’ technology to produce today’s semiconductors.

They make microprocessor production possible.

And lately, they’ve been catching the attention of financial pros.

According to our TrackStar data, money managers searched out Applied Materials stock 3.5x more often than its peer ASML (ASML).

Despite semiconductor demand slowing in the back half of 2024, Applied Materials management believes 2025 will be a stellar year for the company.

Here’s why.

Applied Materials’ Business

At the foundation of chip production, AMAT provides the sophisticated machinery and processes needed to fabricate semiconductors. 

The company develops and sells equipment used in key stages of wafer fabrication, including deposition, etching, and metrology.

Semiconductor manufacturers, often called foundries or integrated device manufacturers (IDMs), use AMAT’s equipment to produce chips. 

Operating across 24 countries with a workforce of approximately 35,200 employees, the company’s product portfolio includes atomic-level precision deposition, etching, and metrology systems catering to the world’s leading semiconductor and display manufacturers. 

Applied Materials’ technology is crucial in advancing artificial intelligence, 5G communications, and other emerging technologies.

The company segments its business into the following areas:

• Semiconductor Systems (72% of total revenues) – Provides manufacturing equipment, services, and software for producing semiconductor chips.
• Applied Global Services (23% of total revenues) – Offers equipment installation, maintenance, optimization services, spare parts, and upgrades.
• Display and Adjacent Markets (4% of total revenues) – Supplies manufacturing equipment for the global display industry, including OLED and LCD technologies.

In the third quarter of fiscal 2024, Applied Materials reported record revenues of $6.78 billion, a 5% increase year over year. 

The company’s strong performance was driven by growing demand for AI-related technologies, with CEO Gary Dickerson noting:

“The race for AI leadership is fueling demand for our unique and connected portfolio of products and services.”

Source: Applied Materials Q3 2024 Investor Presentation

The company’s focus on energy-efficient computing aligns with the industry’s push towards more sustainable and powerful AI technologies. 

This includes Gate-All-Around (GAA) nodes, which improve performance, lower power consumption, and further miniaturize transistors.

Applied Materials expects to generate over $2.5 billion in revenue from Gate-All-Around (GAA) nodes in the calendar year 2024, potentially more than double that amount in 2025.

Financials

Source: Stock Analysis

The slowdown in demand is evident in Applied Materials’ latest revenue growth.

On a rolling 12-month basis, sales are up just 1.2%. That’s not much higher than 2023’s 2.8%, but it’s well below the double digits posted every year except 2019.

Meanwhile, margins have substantially improved over the years, with free cash flow now at 24.5% compared to sub-20 % before the pandemic.

Excellent capital controls have kept total debt to just $6.7 billion, while cash stands at $9.1 billion.

Meanwhile, cash from operations hit a high of $8.7 billion last year, up from $3.3 billion in 2019, while keeping CAPEX to $1.1 billion.

This has allowed management to comfortably pay a 0.79% dividend and a 2.0% share buyback yield.

Valuation

Source: Seeking Alpha

Despite some dour notes on Applied Materials’ 2024 prospects, the company trades at a reasonable valuation relative to its peers.

At just 23.6x forward earnings, it’s the lowest of the group, sitting just behind Lam Research (LAM). The same is true for Applied Materials’ price-to-cash-flow ratio.

However, both of these metrics are about 20%-30% above Applied Materials’ 5-year average. 

So, it may be the industry as a whole is expensive.

Growth

Source: Seeking Alpha

Applied Materials’ revenue outlook isn’t great at just 5.6%, well below ASML’s 21.2%. 

Interestingly, its multi-year profitability growth rates, particularly net income and EPS, are at the group’s top, while free cash flow growth sits closer to the bottom.

This isn’t to say Applied Materials isn’t as good as the others on this list. It doesn’t face the same cyclicality as the others.

Profitability

Source: Seeking Alpha

While Applied Materials may not be the best in every profitability category, it’s near the top in most.

Importantly, it delivers the best net income margin and a respectable free cash flow margin.

Its consistent profitability shows high returns on assets, equity, and total capital.

Our Opinion 7/10

We believe Applied Materials is well-positioned for multi-year growth.

However, its near-term headwinds could cause shares to decline. And if the broader semiconductor industry is falling, that could push the stock’s price to levels we haven’t seen since 2023.

That said, such a pullback would offer an interesting opportunity to pick up shares of a company that plays such an important role in the global semiconductor supply chain.

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