Despite reporting a decent third quarter, markets focused on Applied Materials’ (NASDAQ: AMAT) outlook, which disappointed investors. The stock fell 7.72% on Friday, August 17. Is the sector investable and is AMAT stock a value play?
AMAT earned $1.20 a share, beating estimates by $0.03 as revenue grew a solid 19.5% Y/Y to $4.47 billion. At an annualized 0.5x sales (over $20 billion in yearly sales), the selling in the stock after the report appears overdone. Fourth-quarter’s outlook is underwhelming. In fact, with Q4 numbers, total revenue will be around $17.1 - $17.4 billion, or growth of 17% Y/Y. Non-GAAP EPS will grow 19% Y/Y to $4.41 - $4.49.
AMAT’s valuation is now at attractive levels, although Micron (NASDAQ: MU) wins the title for even lower valuations. At $47, MU stock trades at just 4x forward earnings. AMAT stock has a 9.5x forward P/E.
Applied’s business diversity is a blessing and curse: display is scaling up nicely but short-term results are weak as business ramps up. The long-term, which few investors seem to have, is strong. Further, the company pegs growth will continue in mobile. Management said: "We see a healthy dynamic across all four device types into 2019."
AI is still a long-term growth area. The company will benefit as new computing architectures customized for workloads proliferates. Second, Moore’s law is decelerating but AMAT expects five growth areas: New chip architectures; new structures within the chip, including 3D; new materials; new ways to shrink chip geometries, including EUV lithography and self-aligned patterning; and new ways to connect chips together, using advanced packaging techniques.
AMAT stock will continue to face selling pressure, creating a solid entry point for patient investors who ignore the day-to-day price movements.
