The growing demand for computer chips across various industries is turning out to be a massive tailwind for semiconductor equipment manufacturer Applied Materials (AMAT 4.29%), helping the company post terrific results quarter after quarter.
The advent of 5G wireless networks, the Internet of Things (IoT), and artificial intelligence (AI) are big catalysts that Applied Materials is heavily involved in. So it was not surprising to see the company deliver impressive results for the fourth quarter of fiscal 2020. That latest report could set the tone for more stock upside even after an already nice showing so far this year.
Let's take a closer look at what's working for Applied Materials, and why it remains a buy despite an impressive rally over the past few months.
Applied Materials is a mix of rapid growth and great value
Applied Materials' fiscal fourth-quarter revenue shot up 25% over the prior-year period to $4.69 billion. Non-GAAP earnings jumped 56% year over year to $1.25 per share. For the full year, Applied Materials delivered 18% revenue growth over fiscal 2019 to $17.2 billion, added a percentage point to its gross margin, and enhanced its operating margin by 2.5 percentage points.
What's interesting to see is that, despite such impressive numbers, Applied Materials still trades at a reasonable valuation. Its trailing price-to-earnings (P/E) ratio of 18.6 is quite attractive given the pace at which it is growing, while a forward earnings multiple of 15.8 points toward future earnings growth. Buying Applied Materials stock at these multiples becomes a no-brainer when considering the company's outlook.
Favorable market conditions
Applied Materials anticipates 19% year-over-year revenue growth in the first quarter of fiscal 2021 to $4.95 billion. Adjusted earnings are expected to increase by nearly 30% over the prior-year period to $1.26 per share. Applied Materials seems confident of sustaining this momentum for the remainder of the fiscal year, as its largest business, semiconductor systems, which accounts for two-thirds of the total revenue, has multiple growth catalysts.
In the foundry business, for example, Applied Materials anticipates that its leading customers will continue to invest in equipment as they build out new fabrication facilities. Foundry accounted for 59% of the semiconductor systems revenue last year, but the business couldn't fire on all cylinders, as certain markets such as industrial and automotive couldn't perform as expected due to COVID-related shutdowns.
As these segments are expected to make a comeback in 2021, semiconductor equipment spending could jump from an estimated $63.2 billion in 2020 to $70 billion next year (a 10.7% increase), according to industry association SEMI. For comparison, semiconductor spending in 2020 is projected to grow just 6% over last year.
On the other hand, Applied Materials points out that the spending on memory manufacturing equipment is rising at a greater pace than semiconductor foundries. Dynamic random access memory (DRAM) and flash memory accounted for the remaining 41% of the semiconductor systems business last year.
Their strong growth is expected to continue in 2021. That's not surprising, as the memory market is benefiting from the huge spurt in sales of 5G smartphones and a turnaround in the PC (personal computer) market. Such opportunities are expected to help Applied Materials deliver a better earnings performance -- and not just next year, but also over a longer time frame, as estimates compiled by Yahoo! Finance indicate.
So investors looking to buy a growth stock trading at an attractive valuation should take a closer look at Applied Materials, as it has a lot going for it.