Applied Materials: Our Valuation Rockets Up on Higher Growth Expectations for This Wafer Titan

We raise our fair value estimate for wide-moat Applied Materials AMAT to $152 per share, from $110, behind higher long-term expectations for growth in both wafer fabrication equipment and for Applied. We believe trends toward advanced packaging, artificial intelligence, and denser roadmaps for both logic and memory chips will drive durable demand for the firm. We expect softer results through fiscal 2024 in a weaker chip market, but would encourage investors to focus on these long-term growth drivers. We see shares as slightly undervalued.

Applied Materials is the largest supplier in the world of wafer fabrication equipment for semiconductors, and we see it holding the broadest portfolio, which should enable it to maintain its leading market share. In our view, Applied Materials’ breadth in chip manufacturing gives it stickier inroads to customers by selling integrated solutions across technologies. We expect Applied Materials to grow at a mid-single-digit pace over the course of market cycles as it benefits from trends toward more-complex chips into the long term, including gate all-around transistors, advanced packaging, and artificial intelligence.

We expect Applied Materials’ results to be prone to semiconductor market cyclicality, but we believe it will achieve growth over the long-term. The firm’s sales are a function of global chip volumes and overall chip complexity, and while we see cyclicality in the former, we see durable growth for the latter. We monitor for geopolitical risk affecting Applied Materials via export restrictions applied between the U.S. and China, but see these controls primarily having an impact on lithography equipment and chip designers thus far. We also like Applied Materials’ significant shareholder returns, funded with its heady cash flow.