Applied Materials (AMAT) Pre-earnings Analysis
Chart done on daily timeframe. Stocks involved in the semiconductor sector have grown in valuation to astronomical numbers in the last 12 months. The two most prominent names to mention are Nvidia and AMD, both of which have reached new all time highs recently, but their price to earnings ratios are far above the “healthy” 15-25 average. The recent rally from Nvidia and AMD has lifted their price to earnings ratio to 90x and 320x (in that order), making them very expensive compared to the average. The continued optimism around artificial intelligence is the catalyst behind the exponential growth we’ve seen in semiconductor companies, but many semiconductor stocks may have grown too expensive in valuation. This is where we see opportunity in Applied Materials, which manufactures equipment and provides services to semiconductor industries, but is only trading at a 20x price to earnings multiple. That makes them one of the most affordable semiconductor companies on the market right now.
Amongst the biggest customers of AMAT are Taiwan Semiconductor (TSM), Intel, and Samsung. TSM’s most recent earnings report officially made them the world’s largest semiconductor maker by revenue, so we expect that growth to be reflected in AMAT’s numbers. AMAT is set to report earnings later this month and analysts are expecting about the same results are the last four quarters. The earnings estimate is 1.89 per share, which we expect them to easily surpass as it has over the last four quarters.
Option chain analysis:
As of now, the option chain for the week expiring 02.16.2024 is reflecting a 47% implied volatility reading, which translates to about a $10 move. If AMAT reaches its targets and sets a strong guidance into 2024, we expect it to move to 188.00-190.00. A miss on earnings however can send them back to 159.00-160.00.