Applied Materials, Inc.: This Could Send AMAT Stock Soaring

AMAT StockIs there a better investment in the tech sector than Applied Materials, Inc. (NASDAQ:AMAT) stock?

It’s possible, but if you don’t have the time and energy to look it up, Applied Material stock has certainly performed brilliantly in 2016. It has gained over 62% year-to-date and has virtually doubled since last summer. No matter how you look at it, Applied Materials stock is one of the hottest of the year, regardless of sector.

The Case for AMAT Stock

Applied Materials stock is a sleeper, meaning it has tremendous growth potential because its following is small, compared to other tech stocks. But, it’s about to wake up. Applied Materials makes the tools and equipment for companies that make semiconductors, and this is a tech area that, while growing now, can grow even more in the longer term. But that’s not the only reason for the mighty rise of Applied Materials stock.

The company’s orders have skyrocketed, up 37% year-on-year in the second quarter (the highest number of orders in 15 years) and investors have responded by pushing the AMAT stock price well into the black. (Source: “Applied Materials Shares Soar 8% On Strong Forecast,” Fortune, May 19, 2016.)

Applied Materials has few competitors, yet it benefits from the intense competition for smartphone sales from various manufacturers worldwide. AMAT expects higher demand from smartphone makers in 2016 and 2017, because of the growing preference for organic light-emitting diode (OLED) displays. You don’t need to know what these are to understand that this means a high growth potential for AMAT in the language of profit. (Source: Ibid.)

Note, however, that AMAT stock has not risen due to higher-than-usual revenues. Indeed, while there has been a surge of orders, in fact, second-quarter revenues were flat year-on-year. If AMAT shares rose, it’s because of the promise of future sales or guidance has been so good. AMAT has fulfilled this promise because the recently published third-quarter results have more than justified this year’s surge in the AMAT stock price.

Applied Materials’ third-quarter revenue actually increased 13%, beating estimates, thanks to 26% more orders and a 60% backlog. Earnings rose as well. In fact, some analysts say that the stock price does not yet reflect AMAT’s potential. (Source: “Applied Materials’ EPS Growing Faster Than Its Stock Price,” Benzinga, August 23, 2016.) AMAT’s sales continue to beat the estimates of analysts, although they are not as impressive on an annual basis.

Be warned, however, dear reader. Applied Materials is more of a cyclical business than the companies it supplies. It has periods of huge orders and then slowdowns. In that sense, it is similar to the aerospace sector, except that the industrial investments are smaller and far less risky. This allows for the company to experience boom-and-bust cycles, which might create the perception of instability for some inexperienced investors—especially those focusing on longer terms.

So, investors need to be able to sustain some slow periods, but the kind of growth that the company has experienced lately—coupled with the OLED display revolution—suggest the boom period will be longer than usual. The emergence of a significant increase in revenue certainly makes Applied Materials a top stock to watch this year and well into 2017.

The Bottom Line on AMAT Stock

The company has solid fundamentals and its business clearly delivers strong earnings, given the way these have grown even in periods of lower revenue growth (i.e. second-quarter 2016). Moreover, AMAT’s financial situation appears to be excellent and that justifies several successive upward earnings forecasts from analysts in recent months.