Shares of Applied materials (NASDAQ: AMAT) have delivered gains of 28% so far in 2024, despite a sharp pullback since hitting a 52-week high on July 10. And there’s a good chance this supplier of semiconductor manufacturing equipment can close out the year with more upside.
The company reported third-quarter fiscal 2024 results (for the three months ended July 28) on August 15. Revenue and earnings were better than investors had expected, while the outlook also beat expectations.
Let’s take a closer look at Applied Materials’ latest quarterly results and find out why this chip equipment supplier appears poised for more growth.
AI Expands Applied Materials Market
Applied Materials posted record revenue of $6.78 billion in the fiscal third quarter, a 5% improvement over the same period last year. The company’s adjusted earnings per share rose 12% year over year to $2.12. Wall Street would have been satisfied with earnings per share of $2.03 on revenue of $6.68 billion.
Even better, the forecast beat consensus estimates. The company expects revenue of $6.93 billion in the fiscal fourth quarter, along with earnings of $2.18 per share at the midpoint of the forecast. The guidance is slightly better than Wall Street expectations of earnings of $2.12 per share on revenue of $6.92 billion.
The stock fell despite posting better-than-expected results and guidance, likely because investors expected more growth from rising demand for AI chips, which is leading to stronger investments in chipmaking equipment by foundries and chipmakers.
But management said weaknesses in the automotive and industrial markets weighed on performance. The company expects that weakness to resolve over the long term thanks to growth in electric and autonomous vehicles, as well as adoption of the Internet of Things within the industrial market.
Investors should note that AI likely represents the largest growth opportunity for Applied Materials. The company is counting on a transition from the fin field-effect transistor (FinFET) architecture to the gate-all-around (GAA) transistor architecture to drive growth.
Chipmakers and foundries have adopted the GAA architecture to produce AI chips due to its ability to simultaneously deliver higher performance and reduce power consumption. GAA plays a central role in chip production based on a 3-nanometer process node, and the 3nm chip market could see an annual growth rate of nearly 39% through 2030.
Applied Materials management indicated during its latest earnings conference call that the switch from FinFET to GAA transistors expands the available market.
The company is also benefiting from the rapidly growing adoption of high-bandwidth memory (HBM), which is used in AI graphics cards from companies including Nvidia And AMDThe company’s HBM packaging revenue is expected to grow 6x by 2024 to $600 million from last year. This represents another healthy growth opportunity for Applied Materials, as the HBM market is expected to grow 68% annually through 2030.
The drivers mentioned above indicate that Applied Materials’ growth rates will improve in the coming years. Huge demand for AI chips and an improvement in the automotive and industrial markets are likely the reason analysts expect the company’s revenue to grow more healthily in the next few fiscal years after jumping from a low-single digit amount in the current year to $27 billion.
How much upside potential can investors expect?
Applied Materials’ acceleration in revenue growth will also trickle down to the bottom line. The company’s earnings came in at $8.05 per share in fiscal 2023, and the current-year estimate points to just a 4% increase, as we can see in the chart below.
Applied Materials’ earnings are expected to grow by double digits over the next few fiscal years, with analysts predicting a compound annual growth rate of 15% over the next five years. Based on the company’s fiscal 2024 earnings forecast of $8.42 per share, they could reach $16.94 after five years.
The stock is currently trading at 22 times expected earnings, a discount to the Nasdaq-100 index’s forward price-to-earnings multiple of 27 (using the index as a proxy for tech stocks). Assuming Applied Materials trades at a similar multiple after five years, the stock could rise to $373. That would be an 80% increase from current levels.
And if the market decides to reward the company with a higher earnings multiple due to improved growth, it could deliver stronger earnings over the next five years. So investors looking to add an AI stock to their portfolio that’s currently trading at an attractive valuation would do well to take a closer look at Applied Materials.
Should You Invest $1,000 in Applied Materials Now?
Before you buy Applied Materials stock, you should consider the following:
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Applied Materials and Nvidia. The Motley Fool has a disclosure policy.
1 Artificial Intelligence (AI) Stock You Need to Buy Now Before It Goes Crazy was originally published by The Motley Fool
