(AMAT) (Applied Materials)
Overview of the Company - Applied Materials is a manufacturer of semiconductor equipment and sells equipment needed to make chips and LED displays for all kinds of pieces of technology from phones to TVs.
Fundamental Analysis - There is a huge chip shortage problem still transpiring and the demand for the goods that Amat makes is incredibly huge right now. Chips go into everything from industrial to consumer products. A most recent example is the car shortage, where manufacturers had to shut down facilities because there simply were not enough chips. This shows the incredibly high demand that these chip companies have to meet. This demand should increase prices and profitability for these companies. It is worth noting that this was a long time ago and many of these companies have already had this shift priced into their stock by now.
How (AMAT) Stacks Up to Competitors - Amat mainly competes with Lam Research (LRCX) as they both sell semiconductor equipment, while the other two companies we will be comparing are focused more on creating semiconductors, wireless solutions and chips. All four companies are highly profitable at around 25%, but the semi cap equipment companies, Lam and Amat show much higher return on equity. All bring in relatively the same amount of revenue (around the 20 billion range except for NXPI), however, AVGO shows the highest quarterly growth rate (year over year). NXPI and Broadcom (AVGO) both trade around 8 times book, while Lam and Amat trade well over 10 times, but they have a much better (lower) debt to equity ratio. One thing to note is if you want a pure automotive play, NXPI is the clear front runner as they almost get half their revenue from the automotive industry. AMAT and LRCX have much lower P/E ratios compared to AVGO and NXPI. Amat also has the lowest dividend yield while AVGO has the highest - near 3 percent.
Bull Case - As the economy reopens I believe that AMAT can dramatically increase its revenue as there is so much demand for chips. Amat’s current revenue per share is $23.65 and it makes about $5.75 in earnings off that. In this next year Amat can drastically increase its revenue and earnings to $30.3 and $7.36 respectively due to more sales. This means not only higher revenue and profit numbers, but they can increase profitability as they will be able to charge higher prices, boosting their EPS to around 7.7. This potential EPS number times their current P/E ratio gets them to around 186.64%. This indicates about 33% upside from here.
Bear Case - Amat faces stiff competition and an economy that may not be fully ready to rev up. Amat has beat earnings per share estimates the past 4 quarters but the next four will be quite difficult. Amat could very well miss on EPS expectations the next four quarters and face just a small boost in revenue. However, Amat has responded very well to breaches of its 50 DMA in the past 5 years and with the 50 day around $113, I believe a price drop lower than that is highly unlikely. Additionally a strong base has formed at around 124, and this is likely the minimum bearish price target.
Valuation and My Price Target - I believe that while Amat has a strong technical base, it still has yet to have a meaningful break of resistance level of $141. Therefore, if we don't see EPS beats we could very well see Amat trading within the 50 DMA and $141 channel for the next year. However, I do believe small beats are in store for this stock and it is likely Amat breaches the 6.25 EPS mark giving it a price target of about $151 assuming the P/E stays consistent. Small upside from here, but if Amat is unwilling to break through the resistance level of $141 in the short term, my price target will remain at about 151 or 8.6% upside from here.
The Verdict - BUY HOLD SELL
AVGO and NXPI have been strong, using their 50 DMA as a support level and an established base. Lam has been struggling but has a pretty strong base at around $580 - its 200 DMA. Finally AMAT has been trading around 50 day for some time now and if you can buy it around there I believe that AMAT will provide good returns. At $135 AMAT is a strong performer, but as it ventures too far from its 50 DMA it will find a way to retreat back to around that same level. I would initiate a position at around 135, as I think AMAT is poised for a strong future to about 151, but I believe that as of now while it is trading around 140 AMAT is a HOLD.
*all data provided by yahoo finance and nasdaq.com and forbes