Applied Materials Stock to Fly High on Secular Tailwinds

AMAT stockAMAT Stock Looking At A High Growth Phase

Applied Materials, Inc. (NASDAQ:AMAT) reported fiscal first-quarter results Wednesday and the upbeat results proved once again that the upward march of AMAT stock is not going to stop any time soon. The business growth would be lifted by strong tailwinds in areas like the Internet of Things (IoT), cloud computing, and autonomous driving, thereby providing a lot of room for Applied Materials stock to grow.

The leading semiconductor equipment maker delivered record earnings per share (EPS), with adjusted EPS coming at $0.67 per share. Applied generated record new orders worth $4.24 billion, which was an increase of 86% year-over-year. The Q1 2017 net sales were at $3.28 billion, up 45% year-over-year. Further, the company expects to post record revenue as well as EPS in Q2 of fiscal 2017. (Source: “Applied Materials Delivers Record Earnings Per Share,” Applied Materials, Inc., February 15, 2017.)

In the second quarter, net sales are expected to be in the range of $3.45 billion to $3.60 billion. The president and CEO of the company, Gary Dickerson, said that 2017 was expected to be another outstanding year for Applied Materials and that the company’s inflection-focused innovation strategy was delivering results.

It is no wonder that Applied Materials stock was one of the top stocks of 2016 in the S&P 500 Index, with NVIDIA Corporation (NASDAQ:NVDA) leading the pack. AMAT stock gained almost 73% in the year 2016 on the back of higher demand for its chip manufacturing equipment.

In its latest annual report, the company outlined the major drivers that are creating new opportunities for Applied Materials. The company’s management says that in both semiconductor and display, they are witnessing dramatic advances in technology. Applied Materials is in the early stages of large, multi-year, industry inflections that were helping the company post record performance, and these will also continue to boost growth for many years to come. (Source: Ibid.)

The company listed these inflections as follows:

  1. Memory customers ramping up demand for 3D NAND, thereby expanding the addressable market of Applied Materials.
  2. Foundry and Logic customers innovating in transistors and interconnects for 10 nanometer and 7 nanometer devices
  3. Sophisticated circuit patterning approaches that use materials engineering to shrink devices
  4. Innovations in display that included the fast introduction of organic light-emitting diode (OLED) technology

At the beginning of the year, Arthur Sherman, VP of Corporate Strategy and Marketing, shared his business outlook with Semiconductor Packaging News. He emphasized how Applied Materials is well positioned to benefit from a number of emerging trends such as the IoT, cloud infrastructure, artificial intelligence (AI), augmented reality (AR), virtual reality (VR), and smart vehicles.

Sherman also pointed out how the increased demand for a broader mix of chips to serve the more diversified variety of applications has changed the semiconductor industry, making it much less volatile. (Source: “Perspectives on the Semiconductor Industry in the Year Ahead,” Applied Materials Blog, January 26, 2017.)

This trend supports Applied Materials’ view that demand for semiconductors and capital equipment is becoming less cyclical, which is a major advantage for the entire industry ecosystem. This makes AMAT stock less susceptible to volatility.

The following chart shows the strong comeback made by Applied Materials stock in the last year after being quite volatile in the past.

AMAT chart

Chart courtesy of StockCharts.com

AMAT stock has gained about 23% over the last five years when the S&P 500 posted around 14% returns.

OLED Adoption to Lend Support to AMAT Stock

Amid the high expectations surrounding the next-generation “iPhone” to be released by Apple Inc. (NASDAQ:AAPL) later this year, the rising demand for OLED displays from the smartphone industry is likely to benefit AMAT stock.

Rumors that Apple will opt for OLED displays in its next iPhone have been making the rounds for quite a while, and the company stands to benefit immensely from this development. Applied Materials has already received a number of orders for its OLED display equipment, and it looks like Applied Materials stock has more room to run.

CEO Gary Dickerson says that the demand for advanced technology and chips will only keep rising, as the smartphone race gets more intense. In an interview with CNBC on Thursday, Dickerson stated that the company had never been in a better position.

He believes that OLED adoption in mobile devices will continue to increase. “Our markets are fundamentally stronger than they’ve ever been,” said Dickerson. He added, “Applied equipment is used to manufacture every chip and advanced display in the world.” (Source: “Applied Materials CEO: We’re in the “early innings” of OLED adoption into smartphones,” CNBC, February 16, 2017.)

Strong Competitive Edge to Drive AMAT Stock Higher

The company has limited competition and, with the way it is leading in materials innovation, there does not seem to be any new threat coming any time soon. The company has some big-ticket customers, like Intel Corporation (NASDAQ:INTC) and NVIDIA, that will likely keep the momentum going for Applied Materials stock. NVIDIA also declared strong results recently, and its positive outlook bodes well for Applied Materials growth.

From the IoT to autonomous vehicles, the new solutions that the technology world is looking for are dependent upon materials innovation, and Applied Materials is the leader in this field.

Moreover, the company is excited about emerging trends in VR, AR, big data, AI, and autonomous vehicles. These are the new drivers for semiconductor and display, and cover numerous applications in the consumer, enterprise, and industrial spaces. This is in addition to the existing demand for personal computers (PCs), mobility, and other consumer electronics.

Applied Materials stock is up almost 18% over the last three months as compared to the S&P 500, which gained eight percent. Given the strong demand from the existing—as well as emerging—sectors, AMAT stock appears to be a good bet for the long term.