In the long term, the company expects AI to significantly expand its addressable market.
Applied Materials (AMAT 1.23%) shares have experienced a steep decline since hitting a 52-week high on July 10, but they are still up 28% so far in 2024. And there's a good chance the supplier of semiconductor manufacturing equipment could finish the year on another upswing.
The company reported its third-quarter fiscal 2024 financial results (for the three months ending July 28) on August 15. Revenue and profits beat investor expectations, and guidance also came in ahead of expectations.
Let's take a closer look at Applied Materials' latest quarterly results to see why the chip equipment supplier is poised for further gains.
AI is expanding markets for Applied Materials
Applied Materials delivered record revenue of $6.78 billion in the third quarter, up 5% from the same period a year ago. The company's adjusted earnings per share rose 12% year over year to $2.12. Wall Street would have been content with earnings of $2.03 per share on revenue of $6.68 billion.
Even better, the company's guidance beat consensus estimates: The company expects fourth-quarter revenue of $6.93 billion and earnings per share of $2.18, at the midpoint of its guidance range. The forecasts are slightly above Wall Street's expectations of $6.92 billion in revenue and $2.12 per share in earnings.
The stock price fell despite the better-than-expected earnings and guidance, likely as investors expected further growth on the back of rising demand for AI chips, which has led foundries and chipmakers to invest in chip-making equipment.
But management said weakness in the auto and industrial markets was weighing on results, which the company expects will fade over the longer term due to the growth of electric and autonomous vehicles and the adoption of the Internet of Things in industrial markets.
Investors should keep in mind that AI is perhaps Applied Materials' biggest growth opportunity, as the company is hoping the transition from fin field-effect transistor (FinFET) architecture to gate-all-around (GAA) transistor architecture will help drive growth.
Chipmakers and foundries are adopting the GAA architecture to manufacture AI chips because it can simultaneously improve performance and reduce power consumption. GAA plays a central role in manufacturing chips based on the 3-nanometer process node, and the 3nm chip market is likely to register annual growth of around 39% through 2030.
Applied Materials executives said during its latest earnings call that the transition from FinFET to GAA transistors will expand the available market.
The company is also benefiting from the rapidly expanding adoption of high-bandwidth memory (HBM) found in AI graphics cards from Nvidia, AMD, etc. The company's revenue from HBM packaging is forecast to grow sixfold from last year's levels to $600 million in 2024. This represents a healthy growth opportunity for Applied Materials, as the HBM market is expected to grow 68% annually through 2030.
The factors above suggest improved growth for Applied Materials over the next few years. Strong demand for AI chips and improving automotive and industrial markets are likely the reasons why analysts expect the company's sales, which grew low single digits to $27 billion this fiscal year, to grow at a healthier pace over the next two years.
AMAT's revenue forecast for the current fiscal year. Data from YCharts.
How much upside can investors expect?
Applied Materials' accelerating revenue growth is expected to spill over into its bottom line, as the company projects earnings of $8.05 per share in fiscal 2023, with forecasts indicating a modest 4% increase this year. You can see this in the chart below.
AMAT's EPS forecast for the current fiscal year. Data from YCharts.
However, Applied Materials' profits are expected to grow at double-digit rates over the next few years, with analysts predicting a compound annual growth rate of 15% over the next five years. The company's earnings per share forecast for fiscal 2024 is $8.42, and could reach $16.94 five years from now.
The company's shares currently trade at 22 times forward earnings, a discount to the Nasdaq 100's forward earnings of 27, which we use as a proxy for tech stocks. If we assume Applied Materials is trading at a similar multiple five years from now, its shares could jump to $373, an 80% increase from current levels.
And if the market decides to reward the company with a higher earnings multiple due to its improving growth, the company could see bigger gains over the next five years. Therefore, investors looking to add an AI stock to their portfolio that is currently trading at an attractive valuation would be wise to take a closer look at Applied Materials.
Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares in and recommends Advanced Micro Devices, Applied Materials, and Nvidia. The Motley Fool has a disclosure policy.
