Applied Materials (AMAT 2.00%) stock has been in fine form on the market in recent weeks, with shares of the company rising 21% since the beginning of July. Now it seems that this high-flying semiconductor play could head higher following its latest results.
The semiconductor equipment supplier released fiscal 2022 third-quarter results (for the three months ended July 31, 2022) on Aug. 18. Wall Street was surprised by the stronger-than-expected numbers, as recent reports from semiconductor bellwethers such as Nvidia and Intel have pointed toward a slowdown in semiconductor sales.
Applied Materials surprises investors with healthy demand
Applied Materials delivered fiscal Q3 revenue of $6.5 billion, an increase of 5% over the prior-year period. The company's adjusted earnings inched up 2% year-over-year to $1.94 per share. Analysts were expecting $1.78 per share in earnings on $6.27 billion in revenue. But the steps taken by Applied Materials to mitigate the supply chain challenges allowed it to fulfill more orders and deliver better-than-expected numbers.
Even better, Applied Materials' guidance suggests that demand for semiconductor manufacturing equipment is robust. The company guided for $6.65 billion in revenue this quarter along with adjusted earnings of $2 per share. Those numbers are higher than consensus estimates of $6.55 billion in revenue and $1.94 per share in earnings. More importantly, Applied Materials' guidance points toward an acceleration in growth this quarter. Its revenue is on track to increase nearly 9% year-over-year at the midpoint of its guidance.
Applied Materials CFO Brice Hill made it clear on the latest earnings conference call that chipmakers are continuing to place orders for equipment as they look to ramp up capacity. He said, "First, our overall demand remains healthy. Specifically, our orders remained strong in Q3, our backlog increased, overall factory utilization remains high, and customers have added four new factory projects to the long-term road map."
Hill added that there are certain pockets of weakness in the semiconductor market, such as memory chips, where companies are scaling back manufacturing capacity amid falling personal computer and smartphone demand. But demand for industrial semiconductors and automotive chips continues to remain strong.
In simple words, the diversified nature of the semiconductor market allowed Applied Materials to perform well despite headwinds such as a broken supply chain and softness in chip demand from certain niches. This is also the reason why the company expects to put up a solid performance in 2023 as well, with CEO Gary Dickerson stating that Applied Materials' "business will be more resilient than in the past if there is a demand pullback in certain areas of the market."
The stock is still a solid buy
With semiconductor capital spending expected to remain solid thanks to the growing demand for chips, Applied Materials looks set for secular long-term growth. More specifically, the global semiconductor manufacturing equipment market could generate $175 billion in revenue in 2027, compared to $95 billion last year.
That's probably why analysts expect Applied Materials' earnings to increase by nearly 14% per year for the next five years. The company's latest quarterly report and outlook suggest that it is taking advantage of the massive end-market opportunity on offer despite the headwinds discussed above.
As a result, investors looking for a semiconductor stock to buy and hold for the long run should take a closer look at Applied Materials. The stock is trading at 14.5 times trailing earnings and 12.8 times forward earnings -- a discount to its five-year average earnings multiple of 18.4 -- which means investors have a solid window to buy Applied Materials right now and take advantage of its potential growth.
