Shares of Applied Materials Inc. AMAT are up more than 76% since March 20. The company has recovered from the huge plunge experienced between February and March and is now trading just off this year's highs.
The California-based semiconductor equipment and materials company reported its most recent quarterly results last Thursday, beating expectations on revenue and earnings. Shares have gained more than 3% since then and retain a bullish outlook based on the valuation multiples.
The stock is now up nearly 8% this year compared to the S&P 500 Index, which has gained 4.6%.
However, the company's sales to China could be affected by the deteriorating relationship between the U.S. and China. This could affect the bullish outlook in the long term, especially given the fact that the Asian economic giant contributes the biggest share of sales in the company's revenue.
Highlights from quarterly results
In the most recent quarter, Applied Materials reported revenue of $4.4 billion, up 23% from the same period last year. GAAP earnings per share came in at 91 cents, up 49% year over year, while non-GAAP earnings rose 43% to $1.06. Analysts were expecting non-GAAP earnings of 95 cents per share.
From the perspective of different business segments, Applied Materials' semiconductor systems group continued to contribute the lion's share of the revenue, accounting for about 66%, or $2.9 billion. The unit recorded strong revenue growth of 28.3% year over year.
On the other hand, applied global services unit sales grew 11.1% to $1.03 billion, contributing 24% to the revenue mix, while net sales from the display and adjacent markets segment saw an increase of 25.4% to $425 million, which represented about 10% of the total revenue.
China continued to account for the biggest share of Applied Materials revenues with 33%, while Korea and Taiwan accounted for 24% and 16%.
The company expects to post non-GAAP earnings of between $1.11 and $1.23 from net sales of about $4.4 billion to $4.8 billion in the third quarter.
Valuation
From a valuation perspective, shares of Applied Materials trade at a trailing 12-month price-earnings ratio of 19.48. This compares competitively to close peer Lam Research Corp.'s LRCX price-earnings ratio of 25.20. On the other hand, semiconductor industry giants ASML Holding NV ASML and Advanced Micro Devices Inc. AMD trade at price-earnings ratios of 46.31 and 160.15.
When factoring in expected earnings growth for the next five years, Applied Materials still looks cheaply priced compared to industry peers. The company trades at a PEG ratio of 1.06, which compares positively to Lam Research's 1.52. On the other hand, ASML trades at a PEG ratio of 2.32, while AMD's equivalent is 2.14.
In summary, shares of Applied Materials appear to be undervalued compared to its peers. The company has recovered from the recent plunge to register year-to-date gains.
After beating analyst expectations on both revenue and earnings, the outlook remains bullish, but there could be risks relating to some of its addressable markets amid trade tensions between the U.S. and China.
Disclosure: No positions in the stocks mentioned.
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