Why would the market punish Applied Materials (AMAT) when everything about the company is basically fine? Investors can be unreasonable in the short term, but that’s not Applied Materials’ fault, and contrarian investors can take advantage of this. I am bullish on AMAT stock because the company’s financial results were quite respectable, and Applied Materials’ forward guidance isn’t disastrous at all.
Applied Materials specializes in making chip-manufacturing equipment. While it’s not a constant topic of conversation in financial social media, Applied Materials is an underappreciated link in the supply chain for artificial intelligence (AI) chips.
The buyers are trying to recover from a share-price drop, which can’t be blamed on Applied Materials since the technology sector was generally sold off in July and early August. Today, the recovery in AMAT stock stalled out as traders reacted to Applied Materials’ latest round of quarterly results and guidance. Now, it’s time to assess the company’s financials, which aren’t bad at all, and consider whether it makes sense to buy a few Applied Materials shares.
Applied Materials Is Improving in Many Ways
Lately, it feels like the market demands blockbuster results each and every quarter. This is especially true when it comes to chip-related companies since Nvidia (NVDA) always seems to deliver home runs. While Applied Materials didn’t necessarily deliver a grand slam with its third-quarter Fiscal 2024 financial results, the company demonstrated improvement in multiple key areas.
Starting off with the top line, Applied Materials’ revenue grew 5% year-over-year to $6.778 billion. Meanwhile, the consensus estimate called for $6.67 billion in quarterly revenue, so that’s a beat for Applied Materials.
Plus, Applied Materials’ revenue improved year-over-year in all of the company’s most important business segments — Semiconductor Systems, Applied Global Services, and Display and Adjacent Markets. In other words, there wasn’t a lopsided increase in one segment while other segments lagged.
Next, Applied Materials reported a GAAP operating margin of 28.7%, up 0.7 percentage points year-over-year, and a non-GAAP operating margin of 28.8%, up 0.5 percentage points. That’s another area of improvement for Applied Materials, which the market doesn’t seem to appreciate right now.
Furthermore, Applied Materials disclosed adjusted (non-GAAP) net income of $1.767 billion, up 10% year-over-year. If we translate this to adjusted EPS, Applied Materials earned $2.12 per share in Q3 of FY2024, up 12% year-over-year and ahead of Wall Street’s consensus forecast of $2.03 per share.
This bottom-line result adds to Applied Materials’ outstanding track record of quarterly EPS beats. Again, Applied Materials didn’t knock it out of the park like Nvidia usually does, but it’s not really fair to compare every technology firm with the almighty Nvidia.
Why Did AMAT Stock Fall Today?
AMAT stock didn’t collapse on Friday morning, but it did fall as much as 5% to the $201 area before recovering a bit. This is an odd response to Applied Materials’ respectable quarterly results, on a day when the major U.S. stock market indexes were only down slightly.
A Bloomberg report cited Applied Materials’ “in-line sales forecast that disappointed investors who’d been looking for a bigger payoff from artificial intelligence spending.” So, let’s look at the numbers before making any judgments.
For the fourth quarter of Fiscal Year 2024, Applied Materials guided for net revenue of approximately $6.93 billion, plus or minus $400 million. Bloomberg stated that this guidance range “matched the average analyst estimate.”
Also, Applied Materials guided for fourth-quarter adjusted income of $2 to $2.36 per share, the midpoint of which is $2.18 per share. The consensus estimate was $2.15 per share, so the midpoint of Applied Materials’ guidance range actually comes in higher than what Wall Street expected.
If the company’s in-line sales guidance range disappointed investors, then that says more about stock traders’ high expectations than it does about Applied Materials’ financials. Just because the market is somewhat spoiled nowadays, this doesn’t mean you have to expect too much from Applied Materials.
Is AMAT Stock a Buy, According to Analysts?
On TipRanks, AMAT comes in as a Moderate Buy based on 16 Buys and seven Hold ratings assigned by analysts in the past three months. The average Applied Materials stock price target is $246.62, implying 18.85% upside potential.
If you’re wondering which analyst you should follow if you want to buy and sell AMAT stock, the most accurate analyst covering the stock (on a one-year timeframe) is Toshiya Hari of Goldman Sachs (GS), with an average return of 41.61% per rating and a 91% success rate. Click on the image below to learn more.
Conclusion: Should You Consider AMAT Stock?
Applied Materials’ financials are solid and improving, and the company exceeded Wall Street’s top-line and bottom-line consensus estimates. In addition, Applied Materials’ current-quarter guidance is reasonable and not very different from analysts’ consensus estimates.
Yet, in today’s marketplace, some stock traders demand much more than what analysts expect. They’ve set the bar very high, but you can choose to be more sensible and reasonable. Therefore, I don’t expect the sell-off in AMAT stock to last much longer, and I would consider purchasing a few shares today.
