Buy Applied Materials, Inc. (AMAT) Stock While It’s Still Cheap

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Shares of Applied Materials, Inc. (NASDAQ:AMAT) perked up Friday after Morgan Stanley raised its price target on the stock from $47 to $52 (implying roughly 20% upside from current levels). Last week’s rally, though, was somewhat of a relief rally. Over the past month, AMAT stock is down about 6.5%.

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That gives AMAT stock an interesting setup. Year-to-date, AMAT stock is up about 35% and has formed a solid uptrend. But that uptrend has been tested recently as the stock has pulled back some 8% off its early June highs.

Now, Morgan Stanley substantially raises its price target amid this downtrend. The stock has suddenly reversed course and looks like its back on the uptrend.

Does that mean AMAT stock could still go a lot higher from here? The answer is yes. Here’s why.

Applied Materials Has Huge Secular Tailwinds

Like other semiconductor companies, Applied Materials’ growth story is supported by strong, secular trends across many branches of technology.

At an enterprise level, companies in all industries from healthcare to entertainment are utilizing advanced technologies to collect and analyze big data. This is really changing the landscape of technology in the workplace. Its also revolutionizing what big companies need to support this new wave of technology integration. With the Internet-of-Things, artificial intelligence, video data and cloud computing really coming into their own, there has been an explosion of data storage requirements at the enterprise level.

That means there has been an explosion in demand for advanced semiconductor components. That’s the stuff that AMAT sells, and its a big reason why the company has set new earnings records in 4 consecutive quarters.

There is also more to the growth story. At a consumer level, smartphone cameras continue to get better and that requires more advanced memory chips. Smartphones are also beginning to adopt OLED screens. Virtual and augmented reality are starting to go mainstream. Demand for bigger, brighter and better televisions is booming, as 40-inch-plus UHD television sets gradually become more of a norm than a luxury.

All of these consumer tech advancements require advanced semiconductor technology.

Multiple secular tailwinds have converged this year to create a “super-year” for the stock. Last quarter (PDF), revenues grew 45%, gross margins expanded 360 basis points, operating margins expanded 860 basis points and earnings-per-share surged 132% higher.

But that’s trailing growth. Will these tailwinds continue to prop up growth for Applied Materials?

AMAT Is Reasonably Valued

The short answer is yes.

This year’s super-charged growth won’t continue next year, but that doesn’t mean its going to stop all together. The OLED transition in smartphones is just beginning, as is the video game world transition to AR/VR-based gaming. Smartphone cameras will keep getting more advanced, and TVs will keep getting bigger, brighter and better.

The Internet-of-Things and artificial intelligence are two spaces which are really just at the beginning of their growth trajectories. All in all, while this year’s growth will be hard to lap, secular tailwinds should keep revenue growth somewhere in the mid single-digit range over the next several years.

After this year, revenue scale should continue to drive some gross margin expansion as well as operating expense leverage. Overall, operating margins should expand slightly by somewhere between 150 and 250 basis points from FY17 to Fy22. That level of operating margin expansion coupled with mid single-digit revenue growth and share buybacks should lead to low double-digit earnings growth from FY17 to FY22.

After backing out cash, AMAT stock is trading around 13.5-times FY17 EPS estimates. A 13.5-times multiple for low double-digit growth is reasonable. Its actually quite attractive considering most of the market currently trades at premium to growth.

Its also quite attractive because this company is a proven winner. In the past three months, AMAT stock is up 13%. In the past six months, its up 36%. Over the past year? Up 81%. Past three years? 91% higher.

Its that sort of long-term uptrend which makes AMAT a classic “buy the dip” stock.

Bottom Line on AMAT Stock

AMAT stock is reasonably valued considering the number of secular tailwinds that should support healthy growth over the next several years. The recent dip looks an opportunity to buy into a long-term winner.

As of this writing, Luke Lango was long AMAT.


Article printed from InvestorPlace Media, https://investorplace.com/2017/07/buy-applied-materials-inc-amat-stock-while-its-still-cheap/.

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