We came across a bullish thesis on Applied Materials, Inc. (AMAT) on Long-Term Pick Substack by Dan. In this article, we will summarize the bulls’ thesis on AMAT. Applied Materials, Inc. (AMAT)’s share was trading at $183.16 as of Dec 3rd. AMAT’s trailing and forward P/E were 21.27 and 18.87 respectively according to Yahoo Finance.
An aerial view of a modern fabrication center with equipment for producing semiconductor components.
Applied Materials (AMAT) is a global leader in semiconductor equipment manufacturing, providing essential tools for producing advanced chips used in AI, data centers, automotive technologies, and more. The company has maintained its competitive edge through relentless innovation and strategic product expansion, led by CEO Gary Dickerson, a seasoned semiconductor industry executive. AMAT operates in three main segments: Semiconductor Systems, Applied Global Services, and Display and Adjacent Markets. The semiconductor segment, responsible for over 70% of revenue, supplies critical equipment for deposition, etching, and process control, which is pivotal in enabling next-generation semiconductor production.
The company’s diversified operations extend beyond semiconductors to include display and solar solutions, offering stability during industry downturns. Its Applied Global Services division, which supports a robust installed base of over 33,000 systems, generates recurring revenue from maintenance and upgrades, bolstering financial resilience. Geographically, AMAT benefits from a balanced revenue mix, with 30% derived from China and strong presences in the U.S. and Europe, positioning it to capitalize on global semiconductor demand.
This year, AMAT has faced headwinds from a cyclical downturn in memory and DRAM markets, geopolitical tensions tied to U.S.-China trade relations, and macroeconomic challenges like inflation and high interest rates. These factors, alongside concerns about reduced industry capital expenditures, have pressured the stock. However, these issues are seen as transient, with AMAT well-positioned to benefit from secular growth in AI, automotive, and renewable energy markets. The company’s strong economic moat, built on advanced technologies, significant R&D investments, and high customer loyalty, creates substantial switching costs, reinforcing its market dominance. Its focus on addressing the growing complexity of semiconductor manufacturing, including innovations such as gate-all-around transistors and high-bandwidth memory, further enhances its value proposition.
AMAT’s financial health and shareholder-focused capital allocation strategy strengthen its investment appeal. The company generates robust free cash flow, allocating over 80% to shareholder returns via dividends and buybacks, with annual dividend increases since 2018. Simultaneously, AMAT invests over $3 billion annually in R&D to sustain leadership in deposition and process control technologies. Strategic acquisitions, such as Aselta Nanographics, have further solidified its position in advanced chip manufacturing solutions.
In fiscal 2024, AMAT delivered record revenues of $27.18 billion, up 2% year-over-year, with a gross margin of 47.6%. Earnings per share increased by 9% to $2.32 in Q4, driven by stabilization in China’s revenue mix and 6% growth in the semiconductor segment. The company’s launch of innovative products like the MAX OLED™ solution and Sym3 Y Magnum etch system highlights its ability to address the “angstrom era” of chipmaking. Sustainability initiatives, including a commitment to net-zero emissions by 2040, underline its forward-looking strategy.
AMAT projects Q1 2025 revenues of $7.15 billion, a 7% increase, with EPS expected at $2.29. Analysts anticipate steady growth, forecasting revenues of $34.01 billion by FY 2027 and EPS rising to $11.94. AMAT’s stock is currently trading below its fair value estimate of $217.76, presenting significant upside potential. With its solid market leadership, robust innovation pipeline, and strategic financial management, AMAT offers a highly attractive investment opportunity well-positioned to thrive in the growing semiconductor industry.
Applied Materials, Inc. (AMAT) is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 74 hedge fund portfolios held AMAT at the end of the third quarter which was 77 in the previous quarter. While we acknowledge the risk and potential of AMAT as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than AMAT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.