Applied Materials Stock Is Headed to a New High. Here's Why. - Barron's

More than 10 analysts raised their price targets on Applied Materials shares after its solid fiscal first-quarter earnings report.

David Paul Morris/Bloomberg

Chip equipment supplier Applied Materials is in an enviable position. There is a global shortage of semiconductors and the company makes tools the likes of Intel and Taiwan Semiconductor Manufacturing need to grow production capacity.

Late Thursday, Applied Materials (ticker: AMAT) CFO Daniel Durn said that it’s going to continue to be in a similarly enviable position for 10 or more years as chip companies spend big to grow their manufacturing capabilities.

Investors reacted positively to Applied Materials’ fiscal first-quarter earnings report and executive commentary. Shares charged toward a record during afternoon trading Friday, advancing 5.6% to $119.86. If shares close above $118.35, it will notch a new high.

“If we think we’re in the very early innings, this is going to be a decade-plus investment cycle,” Durn said in the earnings call. “Semiconductors are going to be on the key path of enabling some pretty major trends that play out around the world. And so our customers are going to be disciplined. They’ll continue to add capacity where it makes sense.”

Applied Materials handily beat consensus estimates when it reported fiscal first-quarter adjusted profit of $1.39 a share on sales of $5.16 billion. Wall Street had expected earnings of $1.28 a share and revenue of $4.99 billion.

Chip equipment usually is a cyclical business that relies on a few large customers. Earlier this year, Taiwan Semiconductor (TSM), one of Applied Materials’ customers, said it was going to spend $28 billion to increase the capacity of its plants, which marks roughly a 50% increase from 2020.

In a note to clients on Friday, RBC Capital Markets chip analyst Mitch Steves wrote the company’s solid earnings beat prompted his team to reiterate its Outperform rating and raise its target price to $140 from $95. Applied Materials will be the highest-performing stock within Steves’ coverage universe for 2021, he predicted.

The chip equipment supplier’s forecast also gave investors reason to cheer. Applied Materials executives said they expect the market for some of their advanced microprocessor-making tools to be roughly $70 billion this year. The company said it expects fiscal second-quarter adjusted profit of $1.50 a share, plus or minus 6 cents, and sales of $5.39 billion, plus or minus $200 million.

Analysts model fiscal second-quarter earnings of $1.48 a share on sales of $5.33 billion.

“Our favorable long-term thesis is based on Applied’s position in the marketplace where it can outperform industry rates on a consistent basis,” Stifel analyst Patrick Ho wrote in a note to clients after Thursday’s earnings report. “From a semi cap perspective, we believe the company is benefiting from evolving industry dynamics toward materials-based manufacturing and share gains in key process segments.”

Ho rates Applied Materials a Buy with a $140 target price.

Of the analysts who cover the company, 23 rate shares Buy and five rate them Hold. There are no Sell ratings. The average 12-month target price is $133.12, which implies a return of roughly 8%. More than 10 analysts raised their target prices after the results.

Applied Materials stock gained 85% in the past year, as the PHLX Semiconductor index rose 66%. Applied Materials said it plans to host an analyst day in April, during which executives said they plan to share more about long-term plans for the business.

Write to Max A. Cherney at max.cherney@barrons.com

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