The tremendous success of Applied Materials, Inc. (NASDAQ:AMAT), the worldwide largest manufacturer of semiconductor equipment, has a good reason: the world needs many more chips, and Applied will continue to benefit from this trend.
In fact, Applied’s book-to-bill ratio had reached 1.29 in its last quarter. The book-to-bill ratio is the ratio between new orders to actual sales. A ratio greater than one means that new orders exceed sales. Applied’s book-to-bill has been higher than one in seven of its last eight quarters, as shown in the chart below. Moreover, if we sum up all orders and sales in the last eight quarters, we get a book-to-bill ratio of 1.14. Such a high rate indicates a growing demand for Applied’s products and should lead to continuous growth.
Data Source: company reports
Latest Quarter Results
On February 15, Applied Materials reported its first quarter fiscal 2017 financial results, which beat EPS expectations by $0.01 (1.52%). Applied’s revenues of $3.28 billion for the quarter were up 45% year over year while earnings per share of $0.67 increased 158% from the same quarter a year ago. The company showed earnings per share surprise in its last five quarters, after meeting estimates in its two previous quarters, as shown in the table below.
Data Source: company reports
Also in the report, the company offered guidance for its second fiscal quarter which exceeded analysts’ estimates. For the second quarter Applied expected sales of about $3.53 billion up about 44% year over year, and earnings per share of about $0.76 up 124% from the same quarter a year ago, which is quite impressive.
Applied Materials Growth Drivers
In my view, Applied is well-positioned for continuous growth. In fact, analysts estimate a very high annual earnings per share growth for the next five years at an average of 21.6%.
The demand for all kind of semiconductors is poised to increase at a high rate. Recent research by Gartner estimates global semiconductor revenue in 2017 to reach $364.1 billion an increase of 7.2% from the previous year. As we all know from our experience, each time we buy a new desktop or laptop computer, smartphone or tablet, they have more computing power and greater connectivity speed, due to stronger processors and higher content of memory chips. Also, new applications like the internet of things smart homes and cars, OLED screens for televisions and smartphones and smart watches all need more computing power and as a result more and more sophisticated chips.
Although Applied’s overall book-to-bill ratio was at 1.29 in the last quarter, it is worth mentioning that its Display and Adjacent Markets segment had a book-to-bill ratio of 1.50, and this segment is a strong growth driver for the company.
Also, the better than expected results of Micron Technology’s (MU) second quarter which were delivered on March 23 after market close, should encourage Applied’s investors. Micron said that it sees constant high demand for NAND and DRAM, and offered a guidance above market consensus. Since memory chips account for a significant part of semiconductor production, the announced robust demand for this kind of semiconductors is good news for Applied Materials.
All in all, the increasing demand for chips will also bring a rise in new semiconductor capital equipment orders, which will benefit Applied Materials the worldwide largest manufacturer of semiconductor equipment.
Applied Materials Stock Performance
AMAT’s stock has outperformed the market by a significant margin in the last few years. In fact, AMAT’s stock has been the fourth best performer among the 66 S&P 500 tech stocks in the last 52 weeks, gaining 85.6%. Only Advanced Micro Devices (AMD), NVIDIA Corp (NVDA) and Micron Technology (MU) have had higher appreciation; 430.4, 210.6% and 152.1% respectively.
Comparing AMAT’s stock performance to the broad market this year and during the last five years, also demonstrate the big rally that AMAT’s stock has had, as shown in the table below.
Most of top analysts according to TipRanks have reiterated their buy recommendation for AMAT’s stock in the last month, giving an average target price of $40.43 compared to AMAT’s stock close price of $38.76 on April 3. However, as a follower and holder of the stock for many years, I believe that the stock could go much higher.
AMAT Daily Chart
AMAT Weekly Chart
Charts: TradeStation Group, Inc.
Despite its strong price appreciation, according to its valuation multiples, AMAT’s stock is still not expensive. A forward P/E of 13.76 is pretty low for a company with an estimated earnings per share growth of 21.6%. Moreover, the PEG ratio of 0.76 is extremely low; PEG ratio under one indicates that the stock is undervalued. Applied also pays a dividend yielding 1.03%, and the payout ratio is low at 20.3%.
Examining a value ranking system offered by Portfolio123 demonstrates the attractiveness of AMAT’s stock. According to this ranking system, which takes into account value and growth parameters among others, Applied is the top ranked stock among all 65 S&P 500 tech stocks, as shown in the table below.
As I see it, Applied Materials will continue to prosper due to increasing demand for semiconductors. Calculating Applied’s book-to-bill ratio for the last eight quarters results in a ratio of 1.14. Such a high rate indicates a growing demand for Applied’s products and should lead to continuous growth.
Also, strong demand for NAND and DRAM memory chips announced by Micron Technology gives strength to my conclusion that the firm market for Applied’s products is going to continue.
Disclosure: I am long AMAT stock.