Equipment manufacturer and services provider Applied Materials, Inc. (AMAT) operates through three segments – Semiconductor Systems, Applied Global Services, and Display and Adjacent Markets. The company won Intel’s exclusive Supplier Continuous Quality Improvement Award in supplier diversity in 2020. This award recognizes AMAT’s aggressive performance and outstanding quality and business systems. Shares of AMAT have gained 119.3% over the past year and 64.9% year-to-date.

Here’s what could shape AMAT’s performance in the near term:

Robust Profit Margins

AMAT’s revenues have increased 28.5% year-over-year to $19.83 billion over the past year. The company’s gross profit came in at $9.11 billion, translating to a margin of 45.97%. Its net income margin of 22.35% is 276.2% higher than the industry average of 5.94%. In addition, AMAT’s levered free cash flow margin of 15.2% is slightly higher than the industry average, while its EBIT margin of 28.62% is 261.1% higher than the industry average of 7.93%.

Also, the company’s ROE, ROA, and ROTC of 42.18%, 18.4%, and 21% compare favorably with industry averages of 7.92%, 3.7%, and 4.74%, respectively.

Click here to check out our Semiconductor Industry Report for 2021

Promising Growth Outlook

AMAT plans to generate 70% of its future services and parts revenue through subscription-like long-term agreements, with five significant inflections driving its long-term growth. Also, it aims to increase its total revenue by 55%, Semiconductor Systems revenue by more than 60%, and non-GAAP EPS by more than 100% within 2024 (compared to 2020 figures). Also, AMAT has committed to return 80%-100% of its free cash flow to shareholders over this period.

Regarding this, AMAT President and CEO Gary Dickerson said, “The core of our strategy is to be the PPACt enablement company … Our broad portfolio and ability to combine technologies in ways no other company can is accelerating value creation for our customers and puts Applied in a leadership position to advance the state of chipmaking for years to come.”

Analysts expect AMAT’s revenues to rise 28.9% in the current quarter (ending October 2021), 32.1% in the current year, and 9.2% next year. The consensus EPS estimates indicate a 44.8% year-over-year increase in the ongoing quarter, a 58% rise from the same period last year in fiscal 2021, and an 11.8% improvement year-over-year next year. Also, the Street expects AMAT’s EPS to rise at a CAGR of 24.9% over the next five years.

The company has an impressive earnings surprise history, as it surpassed Street EPS estimates in each of the trailing four quarters.

Consensus Rating and Price Target Show Promise

Of the seven Wall Street analysts that rate the stock, five rate it a Buy while two rate it a Hold. The 12-month median price target of $156.43 indicates a 10% potential upside from yesterday’s closing price of $142.27. The price targets range from a low of $139.00 to a high of $175.00.

POWR Ratings Show Promise

AMAT has an overall grade of B, which equates to a Buy rating in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

The stock has a grade of B for Momentum and Quality. It is currently trading above its 50-day and 200-day moving averages of $136.77 and $126.87, respectively, in sync with the Momentum grade. In addition, AMAT’s higher-than-industry profitability ratios justify the Quality grade.

Of the 99 stocks in the B-rated Semiconductor & Wireless Chip industry, AMAT is ranked #37.

In addition to the grades I’ve highlighted, view AMAT grades for Value, Growth, Sentiment, and Stability here.

Click here to view the top-rated stocks in the Semiconductor & Wireless Chip industry.

Bottom Line

AMAT is well-positioned to emerge as a leading player in the chipmaking industry over the next few years. Its breakthrough innovations, strong profit margins, and favorable analyst sentiment make it a good investment bet now.

AMAT shares were unchanged in after-hours trading Friday. Year-to-date, AMAT has gained 65.90%, versus a 19.13% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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