Where Will Applied Materials Stock Be in Five Years?

Applied Materials (AMAT 0.73%) stock price has surged nearly 400% in the past five years, crushing the broader market handsomely as the growing demand for semiconductor manufacturing equipment has supercharged the company's top- and bottom-line growth.

However, investors who have missed out on this impressive rally need not worry. Things are about to get better for Applied Materials in the next five years as the world's appetite for semiconductors is increasing by leaps and bounds. In simpler words, Applied Materials is sitting on stronger growth drivers now than it was five years ago. Let's see why.

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Applied Materials is at the beginning of a major semiconductor investment cycle

Known for selling chip fabrication equipment, services, and software to semiconductor manufacturers, Applied Materials has benefited from an increase in chip demand in the past five years. According to the company's estimates, the semiconductor content in various devices has increased substantially over this period.

Data source: Applied Materials. * 2025 uses forecasted figures.

More importantly, as the table above shows, semiconductor content in those applications is set to jump at a nice pace over the next five years as well. Additionally, Applied Materials points out that the move from an app-centric world to a data-centric world is going to trigger a massive bump in data generation.

The company estimates that 6.6 zettabytes (ZB) of data was generated globally in 2020. By 2025, that number is expected to explode to 157 ZB, driven by the growing adoption of the Industrial Internet of Things (IoT), connected cars, and home automation. That's a huge amount of data as a zettabyte is equivalent to 1 trillion gigabytes (GB). Now, the world will need a lot of chips to generate that much data and to store/process it.

Not surprisingly, Applied Materials estimates that the semiconductor industry's revenue could jump from $466 billion generated in 2018 to $1 trillion in 2030. Semiconductor manufacturers will have to spend a lot of money to bring their factories up to speed in a bid to meet the terrific end-market demand.

As a result, annual spending on semiconductor manufacturing equipment is anticipated to jump from an estimated $62.4 billion last year to nearly $96 billion by 2025, according to a third-party estimate. However, don't be surprised to see the market grow at a faster pace as foundries across the world ramp up capacities.

Image source: Getty Images.

Semiconductor industry association body SEMI points out that manufacturers will start construction of 19 high-volume fabrication facilities by the end of 2021, followed by another 10 next year. More than $140 billion is expected to be spent on these facilities in the next few years. As a result, SEMI expects semiconductor equipment spending to exceed $100 billion next year, compared to $71 billion in 2020.

All of this indicates that Applied Materials is sitting on a massive end-market opportunity, which can give the company's revenue, margins, and earnings a big shot in the arm in the next five years.

All set for impressive long-term growth

Applied Materials finished fiscal 2020 with $17.2 billion in revenue, which was an increase of 18% over the prior year. The company's adjusted earnings had increased 37% during fiscal 2020 to $4.17 per share. Its adjusted gross and operating margins during the year stood at 45.1% and 26.3%, respectively.

According to Applied Materials' fiscal year 2024 financial model, the company's annual revenue could increase to $26.7 billion in a base case scenario. The adjusted gross margin is expected to increase to 48.5% and the operating margin to 32.4%. Its earnings are expected to increase to $8.50 per share at the end of fiscal 2024. So, Applied Materials expects its top line to increase 55% during the forecast period, while earnings per share are expected to more than double in the base scenario.

It is also worth noting that the average annual revenue growth of all its business segments is expected to pick up the pace. The semiconductor systems business, which accounted for two-thirds of its total revenue last year, is slated to record average annual revenue of $16.5 billion from fiscal 2021 to fiscal 2024. That's a big jump from the $10.1 billion annual average revenue recorded from FY17 to FY20.

Given all the tailwinds Applied Materials is enjoying, it is not surprising to see Wall Street expecting the company's earnings to grow at an annual rate of nearly 25% for the next five years. More importantly, the stock is trading at just 27 times trailing earnings, cheaper than the S&P 500's average of 36.6. All of this makes Applied Materials an attractive growth stock that you can buy right now for the next five years, at least.