Applied Materials, Inc. (AMAT) in Santa Clara, Calif., and Lam Research Corporation (LRCX) in Fremont, Calif., are two prominent players in the semiconductor industry. AMAT provides material engineering solutions for making semiconductor chips to electronic manufacturers of flat panel displays, solar photovoltaic cells, and modules. The company also supplies equipment to produce coatings for flexible electronics, packaging, and other applications. LCRX, in comparison, designs, manufactures, markets, refurbishes, and services semiconductor processing equipment used to fabricate integrated circuits. It serves semiconductor memory, foundry, and integrated device manufacturers (IDMs) that make non-volatile memory (NVM), dynamic random-access memory (DRAM), and logic devices.

Despite the current semiconductor chip shortage, the global semiconductor industry witnessed 29.7% year-over-year sales growth in August 2021. To address the shortage crisis and satisfy surging demand, governments and enterprises are making considerable investments in the industry. This, combined with recent technological breakthroughs made by chipmakers, positions the industry for solid growth.

Investor optimism in this space is evident in the SPDR S&P Semiconductor ETF’s (XSD) 13.8% gains over the past three months, versus the SPDR S&P 500 Trust ETF’s (SPY) 4.1% returns. The global semiconductor market is expected to grow at a 7.7% CAGR to $778 billion by 2026. So, both AMAT and LRCX should benefit.

While LRCX’s shares have lost 9.4% in price year-to-date, AMAT’s have surged 3.2%. AMAT is a clear winner with 27.8% gains versus LRCX’s negative returns in terms of their past nine months’ performance. But which of these stocks is a better pick now? Let’s find out.

Click here to checkout our Semiconductor Industry Report for 2021

Latest Developments

On October 18, 2021, AMAT unveiled a unique eBeam metrology system that facilitates a new playbook for patterning control based on massive on-device, across-wafer, and through-layer measurements. This breakthrough in metrology enables the best performance, power, area cost, and time to market, and the company expects it to witness widespread recognition across the industry in the near term.

On September 9, 2021, LCRX announced the expansion of its manufacturing footprint in Oregon. The company expects this new site, which is set to open in December 2021, will supply chipmakers with the critical tools needed to build chips that power advanced electronic devices and further enhance its resilience and ability to meet increasing customer demand as chip suppliers seek to ramp up production globally.

Recent Financial Results

For its fiscal third quarter, ended August 1, 2021, AMAT’s net sales increased 41% year-over-year to $6.20 billion. The company’s non-GAAP gross profit came in at $2.97 billion, representing a 50.3% rise from the prior-year period. Its non-GAAP operating income was $2.03 billion, up 74.9% from the prior-year period. While its non-GAAP net income increased 78.3% year-over-year to $1.74 billion, its non-GAAP EPS increased 79.2% to $1.90. As of August 1, 2021, the company had $6.07 billion in cash and cash equivalents.

For the fiscal third quarter, ended September 26, 2021, LCRX’s revenue increased 35.5% year-over-year to $4.30 billion. The company’s non-GAAP gross profit came in at $1.98 billion, representing a 31.1% rise from the year-ago period. Its non-GAAP operating income came in at $1.39 billion, up 41.1% from the prior-year period. LCRX’s non-GAAP net income came in at $1.19 billion, indicating a 42.7% rise from the year-ago period. Its non-GAAP EPS increased 47.4% year-over-year to $8.36. The company had $4.04 billion in cash and cash equivalents as of September 26, 2021.

Past and Expected Financial Performance

AMAT’s revenue and net income have grown at CAGRs of 8.5% and 17.6%, respectively, over the past three years. The company’s EPS has grown at a 22.7% CAGR over the past three years.

Analysts expect AMAT’s EPS to increase 64.5% year-over-year in the current year and 16.8% next year. Its revenue is expected to grow 35.4% in the current year and 11.8% next year. The stock’s EPS is expected to grow at a 26.9% rate per annum over the next five years.

In comparison, LRCX’s revenue and net income have increased at CAGRs of 13% and 22.4%, respectively, over the past three years. The company’s EPS has grown at a 30.9% CAGR over the past three years.

Analysts expect LRCX’s EPS to increase 25.7% year-over-year in the current year and 5.8% next year. Its revenue is expected to increase 21.3% year-over-year in the current year and 4% next year. Analysts expect the stock’s EPS to grow at a 16.1% rate per annum over the next five years.

Valuation

In terms of forward EV/EBITDA, AMAT is currently trading at 5.23x, which is 17.5% higher than LRCX’s 4.45x. In terms of forward EV/Sales, LRCX’s 13.18x compares with AMAT’s 15.91x.

Profitability

AMAT’s trailing-12-month revenue is almost 1.4 times higher than LRCX’s. However, LRCX is more profitable, with a 33.1% net income margin versus AMAT’s 32.1%.

Also, LRCX’s ROE, ROA, and ROTC values of 75.9%, 20%, and 27.7%, respectively, compare favorably with AMAT’s 49.1%, 17.9%, and 24.8%.

POWR Ratings

Both AMAT and LRCX have an overall C grade, which translates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.

Both AMAT and LRCX have a C grade for Value, which is consistent with their higher-than-industry valuation ratios. AMAT has a 5.23x forward EV/Sales, which is 25.3% higher than the 4.17x industry average. LRCX’s 4.45x forward EV/Sales is 6.6% higher than the 4.17x industry average.

Both AMAT and LRCX have a B grade for Quality, which is consistent with their higher-than-industry profitability ratios. AMAT’s 32.1% trailing-12-month EBITDA margin is 117.8% higher than the 14.7% industry average. LRCX’s 33.1% trailing-12-month EBITDA margin is 124.6% higher than the 14.7% industry average.

Of the 98 stocks in the B-rated Semiconductor & Wireless Chip industry, LRCX is ranked #47, while AMAT is ranked #45.

Beyond what we’ve stated above, our POWR Ratings system has also rated AMAT and LRCX for Growth, Stability, Momentum, and Sentiment. Get all LRCX ratings here. Also, click here to see the additional POWR Ratings for AMAT.

The Winner

Although rising corporate and government investments and massive efforts are being made in the semiconductor industry to address the global chip shortage, the crisis is expected to last until 2023. Given their slightly higher valuations, we think AMAT and LRCX could remain under pressure in the near term. So, we think it could be wise to wait for better entry opportunities in these stocks.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Semiconductor & Wireless Chip industry.

Click here to checkout our Semiconductor Industry Report for 2021

AMAT shares rose $0.49 (+0.36%) in after-hours trading Monday. Year-to-date, AMAT has gained 58.17%, versus a 23.04% rise in the benchmark S&P 500 index during the same period.

About the Author: Sweta Vijayan

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...

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