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Headlines
- Applied Materials has seen a 31% increase in stock value year-to-date, outperforming Texas Instruments.
- The company is expected to report strong Q3 FY'24 earnings and revenue, driven by a potential upturn in the semiconductor cycle and rising AI demand.
- Despite strong AI-related growth, Applied faces challenges due to its significant exposure to the Chinese market amidst U.S. export restrictions.
Applied Materials (NASDAQ:AMAT) has experienced a notable 31% rise in its stock value year-to-date. In comparison, its peer in the semiconductor industry, Texas Instruments (NASDAQ:TXN), has gained about 21% during the same period. As Applied prepares to announce its Q3 FY’24 results around August 15, the anticipation is for earnings to reach approximately $2.02 per share, up from $1.81 in the previous year, with revenues projected at around $6.68 billion, marking a 4% increase year-over-year. What trends might influence Applied's earnings for the quarter?
The previous year presented a mixed performance for Applied Materials, as semiconductor capital spending waned following the lifting of COVID-19 lockdowns. However, there are signs of a turnaround in the semiconductor cycle. Applied’s Q2 FY’24 results exceeded expectations, with revenue remaining stable at $6.65 billion and adjusted earnings at $2.09 per share. The downturn in the semiconductor market seems to have reached its lowest point, with memory prices increasing due to slower supply growth. Additionally, PC sales are expected to show modest improvement this year after a significant decline in 2023.
The semiconductor industry is also benefiting from a surge in demand driven by artificial intelligence. AI workloads require substantial computing power and memory, often necessitating more complex chips that demand advanced manufacturing processes. Applied Materials is well-positioned to benefit from this trend due to its diverse portfolio across the semiconductor production value chain, offering a range of tools and services from materials engineering to process control and integration. This favorable outlook for the semiconductor sector also positively influences technology stocks.
In contrast, Texas Instruments has seen its stock rise by 35% from early January 2021 to around $205, compared to a 45% increase for the S&P 500 over the same period. Arista Networks (NYSE:ANET), another company capitalizing on AI, has experienced a remarkable 300% surge in its stock. Arista specializes in high-speed networks for hyper-scalers and large corporations and is part of the 30-stock Trefis High Quality (HQ) Portfolio, which has consistently outperformed the S&P 500 due to its combination of higher returns and lower risk.
Currently, Applied Materials' stock is valued at around $212 per share, translating to a valuation of approximately 25 times the projected FY’24 earnings. This multiple is slightly elevated compared to historical levels. While trends such as generative AI and cloud computing are favorable for Applied Materials, the company faces potential challenges due to its significant exposure to the Chinese market. The U.S. has been tightening restrictions on the export of advanced semiconductor technology to China. In Q2 FY’24, Applied's sales to China reached nearly $2.83 billion, accounting for about 43% of total revenue, a 21% increase year-over-year.
Applied Materials is valued at approximately $202 per share, slightly below the current market price. This assessment considers various factors influencing the stock's valuation. For a more detailed analysis of Applied Materials' valuation, further insights are available on our platform.
