Applied Materials Analysis
Analysis done on hourly timeframe. Newly released earnings from ASML impacted the semiconductor sector this week, leading shares of many companies lower following the report.**
ASML's earnings are significant because it is the largest technology company on the European market, and its results directly indicate demand in the semiconductor space, both in Europe and internationally. Although the company's earnings met expectations, its forward guidance reflected numbers on the lower end of analyst projections. This sparked a sell-off that wiped over $50 billion off its market cap, dragging down other semiconductor stocks, such as Applied Materials, along with it.
Now that Applied Materials has dropped nearly 20% from recent highs, the question is whether or not it’s a good buy.
Looking at their numbers, AMAT is a stable company that has shown consistent growth over the past few years. Although earnings growth hasn’t been exponential, it has been steady, with annual growth each year since the pandemic. However, growth has been slowing year over year. From 2020 to 2021, revenue grew by 34%, but that growth slowed to just 3% in 2023. Net income has remained positive, but profit margin growth has also decelerated.
On the balance sheet, the company maintains a healthy 2:1 asset-to-liability ratio, with approximately $34 billion in assets and $15 billion in liabilities. Additionally, free cash flow has grown to $6.57 billion in recent years, signaling effective revenue management by the company’s leadership.
At a $150 billion market valuation, Applied Materials is fairly valued, though its price-to-earnings ratio sits at the higher end of the typical 15-25 range. AMAT’s P/E ratio is 24x, which indicates a need to improve profit margins in the coming quarters to lower the P/E, or it risks further declines in market value. It’s worth noting that the semiconductor equipment and materials industry as a whole is valued at 29x, making AMAT, the second-largest company in the sector behind ASML, somewhat more appealing than the industry average, though still on the pricier side.
Overall Market vs. Applied Materials:
The reality is that many semiconductor companies could face significant corrections once the market realizes that artificial intelligence growth will have limits. Only a few standout names, such as Nvidia, have reported exponential growth in this space, but even major players are starting to show lackluster numbers. While this doesn’t make Applied Materials a bad investment, it could be susceptible to correction if AI-related hype wanes.