AMAT Stock Forecast: Where is the Limit for Stock Exponential Growth?

Sergey Okun  This AMAT Stock Forecast article was written by Sergey Okun – Financial Analyst, I Know First.

  • Since November 2020, the company’s stock has grown by 117%
  • Actively allocates money to investors through buybacks and dividends. 3-Year Average Share Buyback Ratio and 3-Year Dividend Growth Rate are 4.8 and 29.1 that better than 98% and 85% of companies in the semiconductors industry
  • DCF support around $156 or over 19% upside for AMAT stock for the coming year
(Source: flickr.com)

Overview

Applied Materials, Inc is a global company with a broad set of capabilities in materials engineering. The Company offer consulting, spare parts, services, automation software, upgrades, and legacy equipment to improve the performance and productivity of the customer’s equipment and fab operations. Applied’s customers include manufacturers of semiconductor wafers and chips, liquid crystal and organic light-emitting diode (OLED) displays, and other electronic devices. Applied’s broad range of equipment and service products are highly technical and are sold primarily through a direct sales force.

Applied Materials is a Delaware corporation with headquarters in Santa Clara, California. Shares of the Company’s common stock are listed on the Nasdaq Global Select Market under the symbol “AMAT”. The company regularly allocates the money through investors by quarterly dividends and share repurchases. In FY2020, the net income increased by 34% with a net margin of 21%. Moody’s Applied Materials credit rating is A3 (Rated as upper-medium grade and low credit risk).

Financial Well-Being in the Period of the Crash

(Source: hippopx.com)

When COVID-19 introduced itself in 2020, technology was one of the key factors that supported economic activity in this catastrophic time. Several major technology inflections are being accelerated as work-from-home, homeschooling, and online retail. According to Statista, the global semiconductor industry growth revenue increased by 5.05% in 2020 and it is expected that revenue growth will reach $469.4 billion with a growth rate of 8.37% in 2021.

(Figure 1 – The Global Semiconductor Industry Revenue for the Period 2005-2021)

The pandemic had a positive effect on AMAT’s revenue that increased by 17.8% in FY2020 and by 10.11% in Q1FY2021. Applied Materials operates in three segments: Semiconductor Systems, Applied Global Services, and Displays and Adjacent Markets. The revenue growth in the Semiconductor Systems, and the Applied Global Services segments are driven by demand for an advanced electronic product (smartphones, personal computers, and automotive electronics), the nature and timing of technological advances in fabrication processes, and semiconductor manufacturers’ wafer starts. Net sales decreased in the Display and Adjacent Markets segment due to lower customer investments in display manufacturing equipment for TVs, partially offset by higher customer investments in display manufacturing equipment for mobile products.  

(Figure 2 – AMAT’s Revenue)

Applied Materials plans that revenue in Q2FY2021 will reach 5.39 billion with a growth rate of 4.4%. Also, the company supposes that revenue will grow by 55.2% for FY2020 – FY2024. The company announced a commitment to return between 80 and 100 percent of free cash flow to shareholders.

On April 5th, 2021 Applied Materials announced Actionable Insight Accelerator (Aix), an innovative platform that accelerates the discovery, development, and commercial deployment of new chip technologies. AIx enables engineers to see into semiconductor processes in real-time, take millions of measurements across wafers and individual chips, and optimize thousands of process variables to improve semiconductor performance, power, area cost, and time to market. The AIx platform works across all Applied Materials process equipment, eBeam metrology systems, and inspection systems and is extendable from lab to fab. By providing engineers with the ability to fingerprint innovative recipes during R&D, AIx accelerates their transfer and ramp into high-volume manufacturing.

Does the Market Undervalue AMAT’s Stock?

(Source: pixabay.com)

Applied Materials is one of the most profitable companies in the semiconductors industry that regularly allocates money to shareholders through dividends and buybacks.

(Figure 3 – Comparison of AMAT’s Profitability Ratios within the Semiconductors Industry)

Despite that COVID-19 has had a catastrophic effect on the global economy, it has been accelerating the infiltration of new technologies into everyday life that is also expected to continue in the post-pandemic world. The digital transformation of companies and the economy as a whole is happening fast and driving robust semiconductor and wafer fab equipment demand. Consequently, Applied Materials trades on high valuation ratios that underlined market expectation that the company will be able to realize its growth potential in the future. Historically, average annual values of P/B, P/S, and P/E (except data for 2010 and 2013) are 3.4, 2.5, and 17.4 respectively; median values of P/B, P/S and, P/E (except data for 2010 and 2013) are 2.6, 2.3 and 16.5 respectively.

(Figure – 4 The Dynamic of AMAT’s Price Ratios)

Applied Materials is the most mature company in the market and has the highest revenue. Despite that AMAT has historically high price ratios, AMAT stock is undervalued in comparison with its competitors. The market evaluates AMAT’s stock with the low fraction of present value of growth opportunities (PVGO) in the current market price among comparable companies.


*PVGO is estimated by Expected EPS from Yahoo Finance
(Figure – 5 Price Ratios and PVGO of Comparable Companies)

I suppose that the lengthy negotiation process for the acquisition of Kokusai Electric Corporation which finally was not approved by the regulator of China explains the low value of PVGO in the current AMAT’s stock price. Kokusai focuses on batch processing or processing many wafers in parallel, particularly for memory wafers. Its key customers include Samsung Electronics Co., Taiwan Semiconductor Manufacturing Co., and Intel Corp. This deal had to expand Applied Materials’ footprint in Asia.

DCF Estimates $156 AMAT Stock Forecast

The DCF analysis shows that AMAT’s target stock price should be around $156 in the coming year. This expected share price makes some 19% upside from the price on April 19th. The below forecast is based on average data from previous years, the direction of the company’s policy, and macroeconomic expectations.

(Figure 6 – DCF Model of AMAT Stock)

I have made the next assumptions and estimations for this DCF:

  • effective tax rate to be 16.71% (average tax rate for FY2016 – FY2020)
  • market Beta and perpetuity growth rate (g) to be 1.5 and 3.7%, respectively
  • the risk-free rate and risk premium to be equal to 1.76% and 5.6%, respectively

COVID-19 had a structural impact on the market risk profile between financial assets, which can have a positive or negative effect on WACC.

(Figure 7 – The Dynamic of Market Beta with the Frame of 5 Years)

The current low value of market beta than it was before the pandemic means that investors ask for less required return from AMAT stock. It is reasonable to expect that in the future when the story with COVID-19 will be over, the beta coefficient will increase that will raise WACC, harming the company value. I made a sensitivity analysis of AMAT based on WACC (in brackets are written the value of Market Beta) and growth:

(Figure 8 – Sensitivity Analysis of AMAT Stock)

Do Technical Indicators Support Bullish AMAT Stock Forecast?

(Source: Yahoo Finance)

As we can see in the chart, currently AMAT’s stock price is on the uptrend and it is higher than all three moving averages (the green line is MA-50; the yellow line is MA-100 and the red line is MA-200). Currently, we can notice some grade of price correction. However, there is not a signal now that after correction the tendency will change from an uptrend to a downtrend.

Conclusion

I take a buy-side on AMAT stock because the stock holds a positive DCF forecast resulting in a $156 target price, i.e., around 19% upside potential. Currently, AMAT stock is being traded with lower price ratios among comparable companies. Applied Materials has a large portfolio of technologies to create, shape, modify, analyze and connect chip structures and devices. On the one hand, Applied Materials actively allocates money to investors through buybacks and dividends. On the other hand, the company has the potential for growth by actively exploring and infiltrate new technology into manufacturing processes. Also, the company looks for opportunities to accelerate growth by acquiring other companies.

It is worth paying attention that the stock-picking AI of I Know First has a high signal on the one-year market trend forecasts, supporting my position for the AMAT stock forecast. The light green for the short-term forecasts is mildly bullish, while the darker green is a strong bullish signal for the one-year forecast.

Past Success with AMAT Stock Forecast

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I Know First has been bullish on the AMAT stock forecast in the past. I Know First analyst published a premium article on July 16th, 2020 about the great AMAT’s stock potential in the coming year. Despite that the prediction one year horizon is not over yet, we can notice a significant current return of some 110% that an investor could have If he bought AMAT’s stock according to the analyst advice.

(Source: Yahoo Finance)
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Please note-for trading decisions use the most recent forecast.