Applied Materials' (AMAT +1.70%) stock price has soared more than 70% over the past 12 months as the semiconductor equipment and services company impressed investors with its accelerating growth.
Robust demand for chips across multiple industries has boosted demand for its products, software, and services -- and that growth cycle won't end anytime soon. But how much of that growth is already baked into the stock?
Let's dig deeper into Applied Materials' business and see if it's still worth buying.
How does Applied Materials make money?
Applied Materials generated 66% of its 2020 revenue from its semiconductor systems business, which manufactures equipment for chipmakers.
Image source: Getty Images.
Another 24% of its revenue came from its applied global services business, which installs and maintains systems for chipmakers. The remaining 9% came from its display and adjacent markets segment, which mainly provides products for manufacturing LCD and OLED screens.
Applied Materials' share of the global semiconductor equipment market rose from 15.9% in 2019 to 16.4% in 2020, according to The Information Network. That expansion helped it reclaim the market lead from ASML (ASML +2.83%), which saw its share dip from 16.9% to 15.4%.
Tokyo Electron (TOEL.Y +5.09%) and Lam Research (LRCX +2.57%) ranked third and fourth, respectively, with market shares of 12.3% and 10.8% in 2020. Both smaller rivals increased their market shares year over year.
But competition isn't a major concern for Applied Materials, which was founded over half a century ago and has a sticky customer base. That resilience is reflected in its adjusted gross and operating margins, which expanded in 2020 after slight declines in 2019.
How fast is Applied Materials growing?
Applied Materials' cyclical growth is firmly pinned to the health of the semiconductor market. Here's how it fared over the past five years:
|
Growth (YOY) |
2016 |
2017 |
2018 |
2019 |
2020 |
|---|---|---|---|---|---|
|
Revenue |
39% |
34% |
19% |
(13%) |
18% |
|
Adjusted EPS |
128% |
86% |
37% |
(27%) |
37% |
Data source: Applied Materials. YOY = Year over year.
Applied Materials' growth decelerated in 2018, mainly due to lower demand from memory chipmakers grappling with sliding market prices. The escalating trade war, which caused some customers to rein in their spending, exacerbated the pressure. Those problems continued throughout 2019, and its sales to display manufacturers also tumbled amid sluggish sales of smartphones and TVs.
But in 2020, most of those headwinds waned as memory prices stabilized, smartphone sales improved, and demand for OLED screens increased. That growth offset its weaker sales to the auto and industrial sectors, which struggled with disruptions throughout the pandemic.
Clear skies ahead
Applied Materials expects its recovery to continue throughout 2021, buoyed by warmer demand from auto and industrial customers, higher memory prices, and rising adoption rates for OLED screens. It also expects new technologies -- including artificial intelligence, virtual reality, and augmented reality -- to expand its total addressable market over the long term.
Based on these expectations, Applied Materials believes its revenue will rise about 19% year over year in the first quarter, and its adjusted earnings will increase 22%-35%. It didn't offer any guidance for the full year, but analysts expect its revenue and earnings to rise 15% and 22%, respectively.
By comparison, analysts expect ASML -- which mainly sells high-end EUV (extreme ultraviolet lithography) machines to foundries -- to generate 36% sales growth and 45% earnings growth this year.
The valuations and verdict
Applied Materials trades at 19 times forward earnings and pays a forward dividend yield of 0.8%. ASML has a much higher forward P/E ratio of 39, and it pays a lower forward yield of 0.5%.
Both companies will likely benefit from the cyclical growth of the semiconductor market this year. However, Applied Materials' growing market share, better-diversified business, and lower valuation arguably make it a more attractive investment than ASML right now.
Applied Materials isn't as well-known as other semiconductor companies, but it plays a crucial role in the global supply chain and will likely generate robust returns in 2021 and beyond. Therefore, I believe it's not too late to hop aboard this rising cyclical stock.
