Applied Materials (AMAT 2.98%) surprised Wall Street with a solid set of numbers for the first quarter of fiscal 2022 despite supply chain constraints that were expected to hurt its sales and earnings.
The semiconductor equipment supplier reported impressive top- and bottom-line growth despite warning late last year that it doesn't expect to fully satisfy the massive demand for its products. So, when Applied Materials released better-than-expected quarterly earnings on Feb. 16, it was surprising to see the stock drop 3%. This, however, could be an opportunity to buy this stock.
Let's take a closer look at Applied Materials' results, guidance, and long-term outlook, which will tell us why it is a top tech stock to buy right now.
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Applied Materials is growing at a nice pace
Applied Materials reported fiscal 2022 first-quarter revenue of $6.27 billion, up 21% year over year and higher than Wall Street's expectation of $6.19 billion. The company's adjusted earnings shot up 36% year over year to $1.89 per share, driven by the higher revenue and a year-over-year increase of 2.7 percentage points in the non-GAAP (generally accepted accounting principals) operating margin. Consensus estimates had pegged Applied Materials' Q1 earnings at $1.86 per share.
It is worth noting that Applied Materials' revenue and earnings were at the higher end of its guidance range. The company had guided for $1.85 per share in adjusted earnings on revenue of $6.16 billion in November 2021. However, management's efforts to procure more components with the help of its supply chain partners helped Applied hit the higher end of its guidance range and deliver record quarterly revenue.
The good part is that Applied Materials expects to post double-digit growth once again this quarter. The company has guided for $1.90 per share in adjusted earnings on revenue of $6.35 billion at the midpoint of its guidance range for the second quarter of fiscal 2022. That would translate into year-over-year earnings growth of 16.5% and revenue growth of 13.8% when compared to the prior-year period's earnings of $1.63 per share and revenue of $5.58 billion.
Wall Street was looking for $1.94 per share in earnings on $6.37 billion in revenue from Applied Materials. However, persistent supply chain challenges led to a light forecast despite robust demand for the company's offerings. Applied Materials CEO Gary Dickerson remarked on the latest earnings conference call that the "industry clearly has a long way to go before supply catches up with demand."
Savvy investors, however, should look past the supply chain problems as Applied Materials' products and services are playing a critical role in solving the semiconductor shortage, which is evident from the company's growing backlog.
Focusing on the bigger picture
Applied Materials' backlog in the semiconductor systems business increased by $1.3 billion during Q1 to a record $8 billion thanks to strong growth in orders. It won't be surprising to see Applied Materials' backlog increase further as the year progresses. That's because the company anticipates a 15% increase in wafer and fab equipment spending this year to $100 billion, which means semiconductor manufacturers are likely to place more orders for its offerings.
The company also points out that its products and services are close to being sold out for the year, which is why it sees its growth extending into 2023 on the back of a substantial backlog. CFO Bob Halliday explained the three reasons why Applied Materials' growth is here to stay on the earnings call:
One, demand for Applied's products is very strong and continues to grow. Two, we remain supply chain limited, and we forecast gradual improvement over the course of the year. Three, we expect to grow our revenue and earnings each quarter through the end of the calendar year. And we believe it is increasingly likely that 2023 will be another growth year.
With the semiconductor market expected to add nearly $85 billion in revenue over the next four years as per third-party estimates, the demand for Applied Materials' manufacturing equipment and services should remain robust in the long run. This explains why analysts are expecting the company's earnings to grow at an annual rate of 16.5% for the next five years.
All of this makes buying Applied Materials a no-brainer right now as it is trading at just 18.5 times trailing earnings, a big discount to the tech-heavy NASDAQ-100's earnings multiple of 32.
