Thematic evaluation
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Applied Materials, Inc. (AMAT)

September 06, 2024

Compared to: KLA Corp. (KLAC) | Lam Research Corp. (LRCX) | Industrial Select Sector SPDR Fund (XLI)

Our reasoning

Applied Materials' current valuation appears fair, balancing strong growth prospects in AI and data center computing against risks from increasing debt and margin pressure. The company's technological leadership and market position support its premium valuation, while the cyclical nature of the semiconductor industry and potential trade challenges introduce downside risk, resulting in a balanced overall assessment.

Key takeaways
  • Applied Materials is a leading player in the semiconductor and display equipment market, with a strong financial position and a diversified customer base.
  • The company is well-positioned to benefit from the long-term growth of the semiconductor industry, driven by the increasing demand for advanced technologies like AI and data center computing.
  • AMAT's profitability is being impacted by increasing operating expenses, which are outpacing revenue growth. This trend warrants monitoring for potential impact on long-term solvency.
  • The company's strong free cash flow generation provides it with the capacity to repay debt, increase dividends, and fund future investments.
  • AMAT faces significant risks from volatile customer demand, supply chain disruptions, cybersecurity threats, complex global trade and regulatory environments, and the need to continuously innovate to meet rapidly evolving technology requirements.
  • The company's valuation is generally in line with its peers, but its declining profitability and increasing debt levels warrant monitoring.
  • AMAT's stock price has been volatile in recent months, reflecting the cyclical nature of the semiconductor and display industries.
  • Overall, AMAT is a company with a strong market position and a solid track record of financial performance. However, the company faces a number of risks and challenges, including volatile customer demand, increasing operating expenses, and a complex regulatory environment. Investors should carefully consider these factors before making any investment decisions.
Fairly valued
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Evaluation summary

  1. Company Overview:

    • Applied Materials, Inc. (AMAT) is a leading global provider of manufacturing equipment, services, and software to the semiconductor, display, and related industries. The company's business model is centered around providing critical tools and solutions for the production of advanced microchips and displays, which are essential components in a wide range of electronic devices.
    • AMAT's product portfolio includes semiconductor capital equipment for etch, rapid thermal processing, deposition, chemical mechanical planarization, metrology and inspection, wafer packaging, and ion implantation. The company also offers a range of services, including equipment maintenance, process optimization, and software solutions to enhance manufacturing efficiency and productivity.
    • AMAT's target market encompasses a diverse range of customers, including leading semiconductor manufacturers, display panel makers, and other electronics companies. The company's customer base is geographically dispersed, with significant operations in North America, Asia, and Europe.
    • For comparative analysis, we will be using the Industrial Select Sector SPDR Fund (XLI) as a benchmark and KLA Corp. (KLAC) and Lam Research Corp. (LRCX) as industry peers.

  2. Financial Performance:

    • AMAT has demonstrated consistent revenue growth over the past few years, driven by strong demand for its products and services in the semiconductor and display industries. The company's revenue has increased from $17.7 billion in fiscal year 2021 to $25.8 billion in fiscal year 2023.
    • The company's profitability has been impacted by increasing operating expenses, which are outpacing revenue growth. While gross margins have improved due to lower material, freight, and logistics costs, unfavorable changes in customer/product mix have partially offset these gains.
    • AMAT's return on assets (ROA), return on equity (ROE), and return on invested capital (ROIC) have been consistently high, indicating a strong ability to generate profit relative to its assets and equity. However, these ratios have been declining in recent quarters, suggesting that profitability is declining.
    • Compared to its peers, AMAT's financial performance has been mixed. While it has consistently outperformed LRCX in terms of revenue growth and profitability, it has generally underperformed KLAC in these areas.

  3. Operational Efficiency:

    • AMAT's balance sheet analysis reveals a strong financial position with a healthy level of liquidity and solvency. The company's current ratio and quick ratio have been consistently above the industry average, indicating a strong ability to meet short-term obligations.
    • AMAT's working capital management has been efficient, with decreasing receivables and inventories suggesting improved efficiency in managing working capital. However, the company's increasing debt levels warrant monitoring for potential impact on long-term solvency.
    • AMAT's cash flow from operations has been strong, providing it with the capacity to fund capital expenditures, share repurchases, and dividends. However, the company's cash flow from operations has been decreasing in recent quarters, which could be due to factors such as increasing operating expenses or changes in working capital.
    • AMAT's free cash flow generation has been strong, providing it with the capacity to repay debt, increase dividends, and fund future investments. The company's free cash flow margin has been increasing, indicating improved efficiency in generating cash flow from operations.
    • AMAT's capital expenditures have been increasing, reflecting investments in new equipment and facilities, likely driven by the company's focus on expanding its manufacturing capabilities and supporting the growing demand for advanced semiconductor technologies.
    • AMAT's dividend and share repurchase sustainability analysis indicates a strong commitment to shareholder returns. The company has a history of consistently increasing its dividend per share and has repurchased a significant amount of its stock in recent years.
    • Compared to its peers, AMAT's operational efficiency has been mixed. While it has outperformed LRCX in terms of working capital management and free cash flow generation, it has generally underperformed KLAC in these areas.

  4. Growth Opportunities:

    • AMAT is well-positioned to capitalize on the growing demand for advanced semiconductor technologies, driven by the need for more energy-efficient computing performance to support the growth of AI and other emerging technologies. The company is investing heavily in research and development to maintain its technological edge and expand its product portfolio.
    • AMAT's strategic initiatives, such as the EPIC platform and the expansion of its integrated "fab-in-a-fab" offerings, are designed to accelerate innovation and growth alongside its customers. The company is also expanding its geographic footprint, particularly in Asia, to capitalize on the growing semiconductor market in the region.
    • AMAT's M&A activity has been strategic, with a focus on acquiring companies that complement its existing product portfolio and expand its market reach. The company has a history of successfully integrating acquired businesses, which has contributed to its growth.
    • AMAT's capital allocation strategies are aligned with its long-term growth objectives. The company prioritizes investments in research and development, capital expenditures, and strategic acquisitions to drive innovation and expand its market position.

  5. Risks and Threats:

    • AMAT faces significant risks from volatile customer demand, supply chain disruptions, cybersecurity threats, complex global trade and regulatory environments, and the need to continuously innovate to meet rapidly evolving technology requirements.
    • The company's increasing debt levels warrant monitoring for potential impact on long-term solvency.
    • The company's decreasing profitability margins warrant monitoring for potential impact on long-term solvency.
    • The company's decreasing cash flow to net income ratio warrants monitoring.
    • AMAT's competitive landscape is highly competitive, with a number of established players vying for market share. The company faces competition from both large, diversified companies and smaller, more specialized firms.
    • AMAT's operations are subject to a complex and evolving regulatory environment, including export controls, intellectual property protection, and environmental regulations. The company faces risks related to compliance with these regulations, which could impact its operations and profitability.

  6. Valuation Analysis:

    • AMAT's valuation metrics, such as its price-to-earnings (P/E) ratio, enterprise value-to-EBITDA (EV/EBITDA) ratio, and price-to-sales (P/S) ratio, are generally in line with its peers. However, the company's valuation has been declining in recent quarters, reflecting concerns about its declining profitability and increasing debt levels.
    • Compared to its peers, AMAT's valuation is generally more attractive than KLAC's but less attractive than LRCX's. This suggests that AMAT may be a more attractive investment option compared to KLAC but less attractive than LRCX.
    • Potential catalysts for AMAT's valuation include continued growth in the semiconductor and display industries, successful execution of its strategic initiatives, and a reduction in its debt levels.

  7. Price Performance:

    • AMAT's stock price has been volatile in recent months, reflecting the cyclical nature of the semiconductor and display industries. The company's stock price has generally underperformed the benchmark XLI over the past three years, particularly in the longer timeframes. However, AMAT has consistently outperformed LRCX, especially in the shorter timeframes.
    • AMAT's volatility has been higher than XLI's, indicating a higher risk profile. The company's beta value indicates that it is more sensitive to market movements than XLI, suggesting that AMAT is likely to experience larger price fluctuations than XLI during market swings.
    • Compared to its peers, AMAT's price performance has been mixed. While it has consistently outperformed LRCX, it has generally underperformed KLAC.

  8. Future Outlook:

    • AMAT's management has expressed confidence in the company's long-term prospects, driven by the growing need for energy-efficient computing performance to support the development of AI and other emerging technologies. The company expects to continue experiencing moderate revenue growth in the future, driven by the growing need for energy-efficient computing performance to support the development of AI and other emerging technologies.
    • Analyst estimates for AMAT's future revenue and earnings growth are generally in line with management's guidance. However, there is some uncertainty about the company's future profitability, given the increasing operating expenses and declining profitability margins.

  9. Summary:

    • AMAT is a leading global provider of manufacturing equipment, services, and software to the semiconductor and display industries. The company has a strong financial position, with ample cash flow from operations to cover debt obligations and fund future investments. However, the company's increasing debt levels and decreasing profitability margins warrant monitoring for potential impact on long-term solvency.
    • AMAT is well-positioned to capitalize on the growing demand for advanced semiconductor technologies, driven by the need for more energy-efficient computing performance to support the growth of AI and other emerging technologies. The company's strategic initiatives, such as the EPIC platform and the expansion of its integrated "fab-in-a-fab" offerings, are designed to accelerate innovation and growth alongside its customers.
    • AMAT faces significant risks from volatile customer demand, supply chain disruptions, cybersecurity threats, complex global trade and regulatory environments, and the need to continuously innovate to meet rapidly evolving technology requirements.
    • AMAT's valuation is generally in line with its peers, but the company's valuation has been declining in recent quarters, reflecting concerns about its declining profitability and increasing debt levels.
    • AMAT's stock price has been volatile in recent months, reflecting the cyclical nature of the semiconductor and display industries. The company's stock price has generally underperformed the benchmark XLI over the past three years, particularly in the longer timeframes. However, AMAT has consistently outperformed LRCX, especially in the shorter timeframes.
    • AMAT's management has expressed confidence in the company's long-term prospects, driven by the growing need for energy-efficient computing performance to support the development of AI and other emerging technologies. The company expects to continue experiencing moderate revenue growth in the future, driven by the growing need for energy-efficient computing performance to support the development of AI and other emerging technologies.
    • Overall, AMAT is a company with a strong market position and a solid track record of financial performance. However, the company faces a number of risks and challenges, including volatile customer demand, increasing operating expenses, and a complex regulatory environment. Investors should carefully consider these factors before making any investment decisions.
Peer fundamentals 
Fundamentals
Insights
  • Applied Materials is a leading global provider of manufacturing equipment, services, and software to the semiconductor and display industries, with a diversified customer base but high exposure to cyclical industry conditions.
  • The company is experiencing moderate revenue growth, driven by strong demand for products related to AI and data center computing.
  • The company's profitability is being impacted by increasing operating expenses, which are outpacing revenue growth.
  • The company's liquidity and solvency positions are strong, with ample cash flow from operations to cover debt obligations and fund future investments.
  • The company's increasing debt levels and decreasing profitability margins warrant monitoring for potential impact on long-term solvency.
  • The company's strong free cash flow generation should provide it with the capacity to repay debt, increase dividends, and fund future investments.
  • The company's strategic initiatives, such as the EPIC platform and the expansion of its integrated "fab-in-a-fab" offerings, are designed to accelerate innovation and growth alongside its customers.
  • Management expressed confidence in the company's long-term prospects, driven by the growing need for energy-efficient computing performance to support the development of AI and other emerging technologies.
Analysis
  • Revenue - Revenue is increasing, driven by strong demand for products related to AI and data center computing, particularly in DRAM, high-bandwidth memory, and advanced packaging. - The company's ICAPS business is expected to achieve a record year, including in China. - The company is well-positioned to capitalize on the industry's major device architecture inflections, leveraging its materials engineering expertise and integrated portfolio of solutions.
    • Profitability
      • The company's profitability ratios are high, indicating a strong ability to generate profit relative to its sales, assets, and equity.
      • However, these ratios are decreasing, suggesting that profitability is declining.
      • This decline in profitability is being driven by increasing operating expenses, which are outpacing revenue growth.
      • The company is investing significantly in research and development to maintain its technological edge, which is contributing to increasing operating expenses.
    • Liquidity
      • The company's liquidity ratios are strong, indicating a healthy ability to meet short-term obligations.
      • The company's strong cash position and increasing working capital suggest a healthy short-term liquidity position.
      • These ratios are increasing, suggesting that the company's liquidity position is improving.
    • Solvency
      • The company's solvency ratios are strong, indicating a low level of financial leverage and a healthy long-term solvency position.
      • The company's total debt to total equity ratio is significantly lower than the industry average, suggesting that the company is not overly reliant on debt financing.
      • The company's debt/EBITDA ratio is also significantly lower than the industry average, indicating a strong ability to service its debt obligations.
      • However, the company's debt levels are increasing, which warrants monitoring for potential impact on long-term solvency.
    • Operational Efficiency
      • The company's efficiency ratios are strong, indicating effective utilization of its assets to generate revenue.
      • The company's decreasing receivables and inventories suggest improved efficiency in managing working capital.
      • The company's increasing free cash flow margin indicates improved efficiency in generating cash flow from operations.
    • Cash Flow Analysis
      • The company's cash flow from operations is decreasing, which could be due to factors such as increasing operating expenses or changes in working capital.
      • The company's capital expenditures are increasing, reflecting investments in new equipment and facilities, likely driven by the company's focus on expanding its manufacturing capabilities and supporting the growing demand for advanced semiconductor technologies.
      • The company's free cash flow generation is strong, providing it with the capacity to repay debt, increase dividends, and fund future investments.
    • Risk Factors
      • The company faces significant risks from volatile customer demand, supply chain disruptions, cybersecurity threats, complex global trade and regulatory environments, and the need to continuously innovate to meet rapidly evolving technology requirements.
      • The company's increasing debt levels warrant monitoring for potential impact on long-term solvency.
      • The company's decreasing profitability margins warrant monitoring for potential impact on long-term solvency.
      • The company's decreasing cash flow to net income ratio warrants monitoring.
    • Future Outlook
      • The company is expected to continue experiencing moderate revenue growth in the future, driven by the growing need for energy-efficient computing performance to support the development of AI and other emerging technologies.
      • The company is expected to continue investing heavily in its manufacturing capabilities and expanding its product portfolio, which will likely lead to further increases in capital expenditures.
      • The company's strong free cash flow generation should provide it with the capacity to repay debt, increase dividends, and fund future investments.
      • The company's increasing debt levels and decreasing profitability margins warrant monitoring for potential impact on long-term solvency.
Most recent earnings report
Financial statements 
All public filings
Comparative Analysis
Benchmarks (as of 2024-09-04)
Industrial Select Sector SPDR Fund (XLI)
  • Performance Comparison:
    • AMAT has shown a mixed performance history compared to XLI. While it has outperformed XLI over the longer periods of 2 years and 3 years, it has underperformed in the shorter periods, including the most recent year. This suggests that AMAT's performance is more volatile and less consistent than XLI's.
  • Risk and Return Analysis:
    • AMAT has generally provided higher annualized returns than XLI, but this comes with significantly higher volatility. AMAT's annualized volatility has been consistently higher than XLI's, indicating a higher risk profile.
    • AMAT's maximum drawdown of 55.14% is significantly larger than XLI's maximum drawdown of 21.64%. This indicates that AMAT is more susceptible to market downturns and can experience larger losses.
  • Risk-Adjusted Performance:
    • AMAT's Sharpe Ratio has generally been lower than XLI's, suggesting that XLI has offered a better risk-adjusted return over the period. This means that XLI has been able to generate higher returns for the level of risk taken.
    • AMAT's beta, consistently above 1, indicates that it is more sensitive to market movements than XLI, which has a beta consistently below 1. This suggests that AMAT is likely to experience larger price fluctuations than XLI during market swings.
  • Overall Assessment:
    • AMAT has shown a higher growth potential than XLI, as evidenced by its higher annualized returns. However, this growth comes with significantly higher risk, as indicated by its higher volatility, larger drawdowns, and higher beta.
    • Investors seeking higher returns should be aware of the increased risk associated with AMAT. XLI, on the other hand, offers a more stable and less volatile investment option with a better risk-adjusted return.
    • The recent trends suggest that AMAT's volatility and drawdowns remain higher than XLI's, indicating a continued higher risk profile.
Peers Price History(as of 2024-09-04)
KLA Corp. (KLAC)Lam Research Corp. (LRCX)
  • Performance Comparison:
    • AMAT has generally underperformed KLAC over the past three years, particularly in the longer timeframes. However, AMAT has consistently outperformed LRCX, especially in the shorter timeframes.
    • AMAT's performance has been inconsistent relative to its peers, with periods of outperformance and underperformance.
  • Risk and Return Analysis:
    • AMAT has generally provided lower annualized returns than KLAC, but higher returns than LRCX.
    • AMAT has exhibited higher annualized volatility than LRCX, but lower volatility than KLAC.
    • AMAT's maximum drawdown was significantly higher than KLAC's, indicating a higher risk profile. LRCX's maximum drawdown was slightly higher than AMAT's.
  • Risk-Adjusted Performance:
    • AMAT's Sharpe Ratio has generally been lower than KLAC's and LRCX's, suggesting that it has not offered as good risk-adjusted returns.
    • AMAT's beta value indicates that it is slightly more sensitive to market movements than KLAC and LRCX, suggesting a slightly higher risk profile.
  • Overall Assessment:
    • AMAT has generally underperformed KLAC in terms of both absolute returns and risk-adjusted returns. However, AMAT has consistently outperformed LRCX, suggesting that it may be a more attractive investment option compared to LRCX.
    • AMAT's higher volatility and maximum drawdown indicate a higher risk profile compared to KLAC.
    • The recent trends in volatility, drawdowns, and Sharpe Ratios suggest that AMAT's risk-adjusted returns have been declining, while KLAC's have been more stable.
    • Investors should carefully consider the relative performance, risk, and valuation of AMAT compared to its peers before making any investment decisions.
Peers Fundamentals(as of 2024-07-31)
KLA Corp. (KLAC)Lam Research Corp. (LRCX)

  1. Market Position and Size:

    • AMAT is the largest company in the peer group, with a market capitalization of 150355.0, significantly larger than KLAC's 100161.0 and LRCX's 99282.4.
    • This size advantage is reflected in AMAT's revenue, EBITDA, and net income, which are all substantially higher than its peers.
    • AMAT holds a dominant market position within the semiconductor equipment industry.

  2. Profitability and Efficiency:

    • AMAT's profitability metrics are generally strong, but they are lower than those of KLAC.
    • AMAT's Gross Profit Margin, EBITDA Margin, and Net Profit Margin are all significantly higher than the industry average.
    • AMAT's return on assets, return on total capital, and return on invested capital are all strong, particularly when compared to the industry average.
    • AMAT's return on equity is lower than its peers, which may indicate that AMAT could improve its efficiency in generating returns from its equity.

  3. Financial Health and Stability:

    • AMAT is a financially healthy company with a strong cash position, a large asset base, and a strong equity base.
    • AMAT's liquidity ratios are strong, and its cash flow coverage of debt is also strong.
    • AMAT's debt levels are higher than those of its peers, which may increase its financial risk.

  4. Valuation and Market Perception:

    • AMAT's valuation metrics are generally in line with its peers, but they are lower than the industry average.
    • This suggests that the market may be undervaluing AMAT's growth potential and profitability.

  5. Cash Flow and Capital Management:

    • AMAT's cash flow generation is strong, with a net operating cash flow and free cash flow significantly higher than its peers.
    • AMAT's free cash flow margin is also higher than its peers, suggesting that AMAT is able to convert a significant portion of its revenue into free cash flow.

  6. Growth and Future Prospects:

    • AMAT's growth rates are generally lower than those of its peers, but they are still positive.
    • AMAT's growth rates have been relatively stable over the past five years, with a low standard deviation for most metrics.
    • AMAT's 3-year CAGR is lower than its 5-year CAGR for most metrics, indicating a deceleration in growth.
    • AMAT's most recent year-over-year growth rates are also lower than its 5-year CAGRs for most metrics, further indicating a deceleration in growth.
    • AMAT's growth is balanced across different metrics, with no significant concentration in specific areas.
    • AMAT's revenue growth has not been accompanied by corresponding profit growth, which may be a cause for concern.

  7. Potential for Investment:

    • AMAT is an attractive investment for investors seeking exposure to the semiconductor equipment industry.
    • AMAT has a dominant market position, strong profitability, and a strong cash flow generation capability.
    • AMAT's valuation is relatively attractive compared to its peers, but it is lower than the industry average.
    • Investors should be aware of the potential risks associated with its decelerating growth and higher debt levels.

  8. Key Risks and Considerations:

    • AMAT's decelerating growth rates may be a cause for concern for investors.
    • AMAT's higher debt levels than its peers may increase its financial risk.
    • AMAT's revenue growth has not been accompanied by corresponding profit growth, which may be a red flag.

  9. Overall Assessment:

    • AMAT is a financially healthy company with a strong cash position, a large asset base, and a strong equity base.
    • AMAT's liquidity ratios are strong, and its cash flow coverage of debt is also strong.
    • AMAT's debt levels are higher than those of its peers, which may increase its financial risk.
    • AMAT's growth rates have been decelerating in recent years, which may be a cause for concern for investors.
    • AMAT is a solid investment with a strong track record of performance. However, investors should be aware of the potential risks associated with its decelerating growth and higher debt levels.