AMAT Stock: Company to Face Future Problems?

Posted On August 30, 2017 4:29 pm

a blue and gray Applied Materials Inc Logo

Applied Materials, Inc. (NASDAQ:AMAT) is on investors’ radar after the company posted excellent third quarter results and also increased its fourth quarter guidance. the third quarter results of AMAT stock got a boost from better-than-expected Service and Display sales.

In the fourth quarter, Applied Materials expects to earn a revenue of $3.85 billion-$4 billion and earnings of $0.86-$0.94. Analysts were expecting a revenue of $3.71 billion and earnings per share of $0.82. The growth prospects in the display sector will offset the slowing demand in the semiconductor industry in the fiscal fourth quarter.

Despite the strong results, Applied Materials stock is under pressure amid a popular sentiment which believes that the company’s growth potential has spiked and it is set to face headwinds in the future. After posting three quarters of around 39% year-over-year revenue growth, the company posted a 32.6% revenue growth in the third quarter, while growth rate in the fourth quarter is expected to come in at just 19%.

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However, this sentiment fails to acknowledge that Applied Materials is operating in a cyclical industry. The company is rapidly diversifying its business to slash its reliance on the semiconductor business.

Third quarter revenue — as shown in the chart below — was the best in seven years, while AMAT stock is expected to meet its estimates for the coming quarter. There is no short-term threat to the growth.


After the third quarter results, Stifel analyst Patrick Ho said in a report that Applied Materials could have a “record year” in 2018. He upped his price target for the stock to $61 from $55. Similarly, Credit Suisse analyst Farhan Ahmad increased his price target for Applied Materials to $62. Mr. Ahmad cited expanding margins, consistent growth and stock buybacks as some of the primary reasons for the price target hike.

JP Morgan recently gave an Overweight rating to Applied Materials. The firm is bullish on the stock as it expects the semiconductor company’s free cash flow and margins to expand. JP Morgan recently said in a report that Applied Materials has a solid operational execution in the semiconductor and display industry.  JP Morgan upped its price target for Applied Materials to $56 from $53.  

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Applied Materials, Inc. (NASDAQ:AMAT) has gained about 34% since the start of 2017. The stock currently has a P/E ratio of 15.37, compared to the industry average of 17.32.

One of the biggest catalysts for AMAT stock are Display and Adjacent Markets segments, whose revenue increased by a whopping 31% YoY in the July quarter. Applied Materials CEO Gary Dickerson said in the conference call that the display business is growing faster than the wafer fab equipment.  The OLED industry’s market worth will rise to $57 billion by the end of 2026.

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