After Earnings, Is Applied Materials Stock a Buy, a Sell, or Fairly Valued?

Applied Materials AMAT released its fiscal first-quarter earnings report on Feb. 13. Here’s Morningstar’s take on Applied Materials’ earnings and stock.

Key Morningstar Metrics for Applied Materials

• Fair Value Estimate: $193.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Applied Materials’ Earnings

Applied Materials' AMAT January-quarter sales rose 7% year over year and 2% sequentially to $7.17 billion. April-quarter guidance implies a slight sequential sales decline at the midpoint, inclusive of roughly $200 million in missed revenue as a result of updated trade restrictions by the United States on China.

Why it matters: We view Applied’s core equipment demand as healthy, despite the China headwind that led the April quarter outlook to miss our model. We see investment in cutting-edge chips, driven by generative artificial intelligence infrastructure buildouts, as the firm’s primary driver in the medium term.

• Applied quantified the total headwind for fiscal 2025 from China restrictions at $400 million, slightly milder than expectations from peers like Lam Research and KLA. We expect healthy growth despite this headwind and don’t expect it to carry past fiscal 2025.
• Applied is best exposed to leading-edge logic and DRAM memory chips, which we see as the biggest targets of chip investment over the medium term, largely driven by AI. This should help Applied see an outsize benefit from this rising investment, in our view.

The bottom line: We maintain our fair value estimate of $193 per share, with our long-term growth thesis intact. We see shares at a slight discount after a 5% after-hours selloff that we attribute to April-quarter guidance missing market expectations.

• We’ve trimmed our fiscal 2025 sales forecast from both the new restrictions on China and some pulled-forward demand after significant lagging edge and DRAM orders in fiscal 2024. We model China dipping to a mid-20% sales mix for the rest of fiscal 2025, versus 30% historically.
• We still expect strong underlying market demand and gradual share gains for Applied over the next five years. In particular, we expect more penetration of advanced packaging techniques that should utilize relatively more of Applied’s equipment and integrated solutions.

Fair Value Estimate for Applied Materials

With its 3-star rating, we believe Applied stock is fairly valued compared with our long-term fair value estimate of $193 per share. Our valuation implies a fiscal 2025 adjusted price/earnings multiple of 20 times and a fiscal 2025 enterprise value/sales multiple of 5 times. The biggest drivers to our valuation are the growth of wafer fab equipment spending and Applied’s ability to increase market share.

We forecast 8% compound annual sales growth for Applied through fiscal 2029. We project strong growth for Applied in fiscal 2025 and 2026, driven in part by robust capacity expansions at chipmakers to supply AI demand. Thereafter, we project mid-cycle growth in the mid-to-high single digits. We expect midcycle growth to be driven by more advanced chip designs at chipmakers that rely on Applied Materials' equipment to manufacture gate-all-around transistors, chiplet designs, and high-bandwidth memory, among other technologies. Applied’s system sales are the most cyclical, and its services business is quite stable, which helps offset some cyclicality on the top line. We expect this revenue stream to rise in the double digits annually over our forecast.

Read more about Applied Materials’ fair value estimate.

Economic Moat Rating

We assign Applied a wide moat, based on intangible assets and switching costs. The firm’s proficiency in WFE comes from top-notch design expertise, in our view, and we think its embedded services business and long-term customer roadmaps are sticky. We also believe the sheer amount of investment required to remain at the forefront of leading chip development (particularly across so many subsections of the market) creates an immense barrier to entry for all but the largest and best-capitalized chip equipment manufacturers. We expect Applied to earn returns on invested capital well above its cost of capital for the next 20 years.

We think Applied holds the most comprehensive portfolio of equipment for semiconductor manufacturing in the world. Its product lines run the gamut of chip manufacturing, can serve logic and memory chipmakers alike with cutting-edge equipment, and have offerings in nearly every category spanning the spectrum of cost and capability. While many WFE peers occupy one or two corners of the market, Applied meaningfully plays in them all. The only exception is lithography, where ASML Holding ASML has a vise grip.

Read more about Applied Materials’ economic moat.

Financial Strength

We expect Applied to focus on generating strong cash flow while prioritizing research and development investment. We also expect it to remain moderately leveraged. As of October 2024, Applied held a net cash position, with $9.5 billion in cash and liquid investments compared with $6.3 billion in total debt. We like Applied’s strong balance sheet, which is supported by long-dated debt, most of which doesn’t come due until after 2030. Applied also has a $1.5 billion revolver it could tap into if needed.

Read more about Applied Materials’ financial strength.

Risk and Uncertainty

We assign Applied a High Uncertainty Rating. The firm is prone to the cyclicality of the semiconductor industry, with times of oversupply and lower capital expenditures followed by strong demand and more manufacturing buildouts. Applied’s results can fluctuate with semiconductor end demand, but we still believe it can grow over the long term.

Applied also faces risks from geopolitical uncertainty, primarily between the United States and China. The US government has levied export restrictions on advanced semiconductor manufacturing equipment, which limits Applied’s ability to ship to Chinese chipmakers. This impact has already been digested, and we believe Applied can largely compensate through demand elsewhere in the world. Still, there is a risk that restrictions ramp up further and become a headwind to sales.

Read more about Applied Materials’ risk and uncertainty.

AMAT Bulls Say

• Applied Materials is the largest WFE provider in the world, with the broadest portfolio and the largest R&D budget of its peers.
• We expect Applied to benefit from drivers of chip complexity, like gate-all-around transistors and advanced packaging.
• Applied has strong profit margins and cash flow, and it sends most of that cash flow back to shareholders.

AMAT Bears Say

• We consider Applied Materials to be a generalist in WFE. The firm competes with more specialized competitors like Lam Research LRCX and KLA KLAC, which could outcompete it in their respective markets.
• Applied faces cyclicality in the semiconductor market, which can lead to years that see lower sales and margin compression.
• Applied faces risk from geopolitical tensions between the US and China that may further inhibit its ability to ship to Chinese chipmakers.

This article was compiled by Aman Dagra.