Share prices of Applied Materials (AMAT +0.24%) have already rocketed 73% over the last 12 months, and yet analysts at Bernstein still see another 19% upside potential in the next 12 months. Earlier this week, the wealth management firm maintained its outperform (buy) rating while raising the price target from $230 to $240. The stock currently trades at around $202 a share.
Why is Applied Materials' stock up?
Applied Materials is a leading supplier of equipment used to make silicon wafers for the chip industry. The company's quarterly revenue growth slowed to a halt in 2022 but an improving outlook for the industry has some analysts on Wall Street becoming more bullish on the stock's prospects.
NASDAQ: AMAT
Key Data Points
Investment in advanced logic chips used for artificial intelligence (AI) could become a growth catalyst. AI is only contributing about 6% to new wafer starts right now but it's projected to grow over 30% per year over the next several years.
Still, management's guidance calls for revenue to be down approximately 2% year over year in the company's April-ending fiscal second quarter, so the business is still in recovery mode.
Investors are making a bet that the company is on the verge of seeing its growth significantly accelerate due to the interest in AI chips and other markets that could provide a boost to Applied Materials' business over the next few years. The Wall Street consensus has the company's earnings per share growing 15% per year over the next five years.
Keep in mind that Applied Materials' shares are not cheap, trading at a forward price-to-earnings ratio of 24. This is historically a fair valuation for Applied Materials. Almost all of the stock's return over the last year was driven by investors paying a higher P/E for the shares. Investors should expect the stock to perform in line with the company's underlying earnings growth from here.
