The year went from bad to worse for Applied Materials (AMAT 0.05%) investors last week when shares of the company crashed 9% following the Nov. 14 release of its fiscal 2024 fourth-quarter results (for the three months ended Oct. 27).
Though the semiconductor equipment supplier's revenue and earnings exceeded expectations, the outlook wasn't solid enough to satisfy Wall Street. Not surprisingly, investors pressed the panic button. Applied Materials stock has now lost 34% of its value since hitting a 52-week high in early July this year.
NASDAQ: AMAT
Key Data Points
However, there were certain silver linings for investors in Applied Materials' latest results. Let's take a closer look at the sharp pullback in the company's stock price to see if it's a buying opportunity for investors.
Applied Materials' growth is gradually picking up
Applied Materials' fiscal Q4 revenue jumped 5% year over year to a record $7.05 billion, while adjusted earnings increased 9% to $2.32 per share. Analysts would have settled for $2.19 per share in earnings on revenue of $6.97 billion, but the strong demand for the company's manufacturing equipment needed for making artificial intelligence (AI) chips helped it beat expectations.
For instance, sales of the company's foundry and logic equipment increased 12% from the prior-year period on account of the growing demand for gate-all-around (GAA) transistor nodes, which are being used by the likes of Samsung to manufacture AI chips. GAA technology should improve going forward as it is the successor to the fin field-effect transistor (FinFET) technology.
GAA is said to be more powerful and efficient than FinFET technology and it is expected to help chipmakers make advanced chips for multiple applications ranging from AI to graphics cards to gaming to automotive to 5G connectivity. On its latest earnings conference call, Applied Materials CEO Gary Dickerson remarked:
Overall, the transition from a FinFET-based node to node with gate-all-around transistors and backside power distribution grows Applied's available market from around $12 billion to approximately $14 billion for every 100,000 wafer starts per month of capacity.
More importantly, Dickerson is confident that the company will be able to "capture more than 50% of the process equipment spending for the gate-all-around nodes." Applied Materials generated $2.5 billion in revenue thanks to the demand for GAA equipment in fiscal 2024, a number that it expects to double in the new fiscal year.
However, the weak spending in other semiconductor end markets such as communications, automotive, and the Internet of Things is weighing on the company. Sales of equipment serving these markets fell on a year-over-year basis in the previous quarter. As a result, Applied Materials' guidance turned out to be mixed. The company is forecasting $2.29 per share in earnings in the current quarter at the midpoint of its guidance range, which is slightly better than the $2.27 per share consensus estimate.
The $7.15 billion revenue guidance is slightly short of the $7.25 billion consensus estimate. However, the guidance points toward a slight improvement in Applied Materials' growth. Its top line is on track to increase by 6.5% from the year-ago quarter, while non-GAAP earnings would increase by 7.5%.
Given that Applied Materials' top line increased by just 2% in the previous fiscal year to $27.1 billion along with a 6% increase in earnings to $8.61 per share, the guidance for the current quarter suggests that the company is about to get off to a better start in fiscal 2025. Analysts expect a double-digit increase in the company's revenue and earnings in the ongoing fiscal year.
AMAT Revenue Estimates for Current Fiscal Year data by YCharts
An attractive valuation suggests a buying opportunity
While analysts expect Applied Materials to deliver stronger growth in fiscal 2025 despite potential headwinds, Applied Materials management expects an improvement in those underperforming segments as well, which means that its actual revenue and earnings growth could be stronger than anticipated.
If that's indeed the case, it won't be surprising to see a turnaround in the company's fortunes on the stock market. That's why investors may want to consider buying Applied Materials while it's currently trading at around 19.6 times trailing earnings -- a discount to the tech-heavy Nasdaq-100 index's earnings multiple of 33.
What's more, Applied Materials carries a 12-month price target of $231, according to 36 analysts covering the stock. That would be a 37% jump from current levels. There is a good chance that this semiconductor stock could hit that mark in the coming year on the back of strong demand for AI chips, as well as a potential turnaround in other semiconductor segments. Investors, therefore, are getting a good deal on Applied Materials stock considering the potential upside it may be able to deliver.
