Applied Materials, Inc. AMAT, a leader in semiconductor manufacturing equipment, has experienced a 20.8% decline in its share price over the past six months. This decline contrasts sharply with the Zacks Electronics – Semiconductors industry, the Zacks Computer and Technology sector and the S&P 500, which have risen 3.4%, 8.4% and 12.1%, respectively.
While such a drop may tempt investors to consider buying the dip, a closer look reveals a mixed picture that supports holding the stock for now rather than diving in.
6-Month Price Return Performance
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Reasons Behind AMAT Stock’s Underperformance
The semiconductor sector has faced several headwinds, weighing on Applied Materials' performance. One significant factor has been the cyclical downturn in the semiconductor market, particularly in the dynamic random access memory (DRAM) and NAND memory segments. AMAT’s heavy exposure to these areas, which have seen delayed capital spending and weak pricing dynamics, has dampened revenue growth prospects.
Moreover, geopolitical tensions, especially concerning U.S.-China trade relations, have exacerbated the uncertainty. As one of Applied Materials’ key markets, China represents a significant portion of its revenues. Ongoing restrictions on exporting advanced technology to China have raised concerns about the company’s ability to maintain growth in this region.
Macroeconomic challenges, including protracted inflationary pressure and still-high interest rates, have also contributed to broader market volatility, adding pressure to AMAT's stock.
Things in Favor of Applied Materials
Despite the aforementioned challenges, Applied Materials has reported stable financials and demonstrated resilience in adapting to a challenging environment. In the most recently reported financial results for the fourth quarter of fiscal 2024, AMAT’s revenues increased 5% year over year to $7.05 billion and surpassed the Zacks Consensus Estimate by 1.5%.
Non-GAAP earnings per share increased by 9% to $2.32 and exceeded the consensus mark by 6.4%. This performance underscores the company’s ability to navigate industry headwinds and maintain profitability.
Applied Materials’ gross margin of 47.5% in the fourth quarter, a 20-basis point increase from the year-ago quarter, highlights its operational efficiency despite facing margin pressures from investments in advanced technologies. The company’s management has expressed confidence in sustaining revenue growth through its robust product portfolio and strategic initiatives.
The Zacks Consensus Estimate for fiscal 2025 and 2026 indicates continued growth for Applied Materials.
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Applied Materials’ Technological Leadership
Applied Materials is well-positioned to benefit from the growing demand for advanced semiconductor nodes. The company has made significant strides in high-aspect-ratio etch and deposition processes, which are critical for producing chips used in artificial intelligence (AI), high-performance computing (HPC) and 5G applications.
In fiscal 2024, revenues from advanced nodes surpassed $2.5 billion, with management projecting this figure to double by fiscal 2025. This aligns with the broader industry trend of increasing investments in cutting-edge semiconductor technologies, making AMAT a key player in the semiconductor ecosystem.
Applied Materials’ diversified product offerings provide stability amid cyclical downturns. The company’s advanced packaging technologies, including those used in system-on-chip designs, have seen significant adoption. In FY2024, revenues from advanced packaging tripled over four years to $1.7 billion, positioning it as a growth driver.
Moreover, AMAT’s recent initiatives, such as the EPIC platform and Silicon Valley EPIC Center, are expected to enhance its ability to support customers’ technological transitions while optimizing costs. These efforts are likely to yield long-term benefits.
Applied Materials’ Attractive Valuation
Applied Materials trades at a forward 12-month price-to-earnings (P/E) ratio of 18.26, significantly below the Zacks Electronics – Semiconductors industry average of 27.81. The stock also trades at a lower P/E multiple than its peers, including ASML Holding ASML, Lam Research LRCX and KLA Corporation KLAC.
ASML Holding, Lam Research and KLA Corporation currently have a forward 12-month P/E multiple of 26.78, 20.23 and 19.41, respectively. This lower valuation offers an attractive entry point for long-term investors who can tolerate short-term volatility.
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Applied Materials’ strong cash flow generation also supports its valuation. AMAT generated free cash flow of 2.17 billion in the fourth quarter and $7.49 billion in the full fiscal 2024. The company’s robust cash flow generation capability enables it to invest in strategic growth areas while returning value to shareholders through dividends and share buybacks.
Conclusion: Hold AMAT Stock for Now
While Applied Materials faces near-term challenges, its strong fundamentals and strategic positioning in advanced semiconductor technologies make it a compelling hold. The company’s leadership in advanced nodes, resilient financial performance and attractive valuation provide a solid foundation for future growth.
However, the cyclical nature of the semiconductor industry and geopolitical uncertainties suggest that investors should exercise caution. For now, holding AMAT stock allows investors to benefit from its long-term potential while weathering current headwinds. Applied Materials currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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