Soaring demand for chips made Applied Materials (NASDAQ:AMAT) a strong performing stock from late 2020, up until the start of this year. During this timeframe, AMAT stock went from around $60 per share, to prices topping $167 per share.
But in recent weeks, due to the tech selloff, along with growing concerns about a growth slowdown, investors have cooled in their enthusiasm for the company, which builds the equipment used to make semiconductors.
After making a brief trip to around $130 per share late last month, it’s starting to bounce back, and it is near $140 per share as of this writing. Given the way market conditions are changing, you may think now is not the time to get into tech stocks. Especially ones that have been boosted by developments that could wind up being temporary in nature.
Yet there’s no reason to worry this is a richly priced tech name, at risk of correcting further.
Even after experiencing a big run-up, it trades at a low 17.2x earnings. There’s also the possibility that growth going forward comes in much higher than expected today. I wouldn’t expect it to make a dramatic bolt higher anytime soon. Nevertheless, this remains a great opportunity for investors looking to buy slow-and-steady plays.
AMAT Stock at a Glance
Like I mentioned above, Applied Materials is a chip stock, but it doesn’t design or build chips. Rather, it designs/builds the capital equipment used to make them. Last year, with the global chip shortage in full swing, this was a great business to be in. That’s evident based on the company’s financials from last fiscal year (ending October 2021).
During FY21, the chip equipment maker saw its revenue rise 34%. With earnings of $5.89 billion, earnings-per-share (EPS) of $6.47 rose 63.8% over the prior year’s quarter. With this, it’s clear it wasn’t hype that fueled the incredible run-up in AMAT stock.
Alas, with the market cycling out of tech, Applied Materials has been caught in the crossfire. Again, there’s also growing concern about this company and its projected growth deceleration during this fiscal year. So, as the excitement simmers down, is it time to avoid it? Not so fast.
On one hand, if you’re expecting it to perform the way it did in the recent past? That doesn’t appear likely. It could continue to see choppy price action, as investors absorb factors like rising inflation, and forthcoming changes to monetary policy.
On the other hand, if we’re talking about the potential to produce solid, steady returns in the coming years? That’s more than possible.
Applied Materials and Secular Growth Drivers
As the chip crisis continues, analysts expect the company to report another of above-average sales and earnings growth. Per sell-side consensus, revenue growth in FY22 should come in at around 15%. Analysts also expect a double-digit boost to EPS as well.
But for the following fiscal year, ending October 2023? With the semiconductor shortage expected to be over again, estimates call for more modest boosts to its top and bottom lines. That is why investors have now given AMAT stock a valuation more befitting a mature, slow-growing business. Yet the market may be underestimating how well it could perform in the years ahead.
That is, the supply chain bottlenecks may be on the verge of going away. Even so, demand for semiconductors appears set to stay strong. As Citi analyst Atif Malik argued, in a research note on chip equipment stocks last month, there are several secular growth drivers that point to the industry continuing to thrive.
In short, concerns that there will be a “chip glut” may be an overreaction. This bodes well for chip equipment makers too. Applied Materials has a strong chance of at least delivering moderate levels of growth in the years ahead. Actual results in FY23, and beyond, could come in much stronger than what’s expected today.
Bottom Line on AMAT Stock
Earning a “B” rating in my Portfolio Grader, it may take time for investors to realize they’ve overreacted when it comes to Applied Materials stock.
The stunning results of FY21 may not repeat themselves in FY22 and FY23. But it’s not as if this company’s growth is coming to a standstill. Most likely, continued strong demand for chips will result in moderate growth. Perhaps, even levels of growth that exceed expectations. This will, once the market gets over today’s worries, allow it to make its way back to higher prices.
If you’re looking for high-quality tech names that may make great long-term holdings, be sure to add AMAT stock to your watchlist.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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