Applied Materials Inc. (AMAT, Financial) is one of the world’s largest suppliers of semiconductor manufacturing tools; it has a hand in making nearly every chip in the world. The company’s systems are used in every step of the process except lithography. From a macro standpoint, the need for faster chips and desire for better technology will only increase.
The company is expected to earn north of $9 per share over the next two years, which equates to over 20% of the current market price. In addition, not even a recession is going to stop its growth. More importantly, Applied Materials is getting more efficient, leading to more profits and higher returns on equity and assets. It has been a long time coming for the company, which used to be the subject of many hype and sizzle cold calls from stockbrokers in South Florida.
Today, the company is earning a ton of money, is priced under 10 times earnings and is sitting on close to $4 billion in cash. In it’s latest quarterly report, which was released last week, the company posted earnings of $1.20 per share, beating estimates by pennies, and revenue of $4.47 billion, up 19.5% year over year. At this rate, it could easily surpass $20 billion in sales in 2019.
Applied Materials should continue to grow thanks to its dominant position in the market and the continued demand for semiconductors. 2019 will see lower growth rates, but, on average, the market has very few down years. Tariffs may hurt the company, but most of its sales are to Korea (28% of net sales), Taiwan (23%) and China (19%), representing its top three regions. These countries aren’t playing trade war games amongst themselves.
The company is the chip equipment industry's standard bearer and may not have the best-of-breed product in every segment in which it operates, but has continued to compete successfully by streamlining operations to lower its cost structure and reinvest some of the savings across research and development in recent years. The company has the broadest product line and offers clients the closest thing to a one-stop shop, especially as the world shifts to machine learning, artificial intelligence and the internet of things. We have nowhere near the total number of connected devices that we will have 10 to 20 years from now.
Applied’s scale and resources allow it to budget in excess of $1.5 billion to cutting-edge technologies and thus puts itself in a position for scale in those areas regardless of the customer. If another company steps up to compete with Intel (INTC, Financial), Samsung (XKRX:005930, Financial), Apple (AAPL, Financial), Micron (MU, Financial) or any of the other chipmakers, Applied Materials will still be a force taking part as the market expands.
In other words, the company will be around for decades to come and could double sales and profits in the next five to seven years. That would put earnings at $7 billion. At 15 times earnings, investors could see a $105 per-share number. While there are 16 guru investors that own Applied Materials, from Ray Dalio (Trades, Portfolio)'s Bridgewater Associates and Joel Greenblatt (Trades, Portfolio) to Steven Cohen (Trades, Portfolio), only David Carlson (Trades, Portfolio) has more than 2% of his assets in the stock. If nothing else, a 2% stake would be a good start as the industry will continue to become more valuable to society. An industry which Applied Materials will continue to lead.
Disclosure: I am not long or short any stocks mentioned in this article.
