Evercore sees 35% upside in Applied Materials stock despite JanQ revenue miss

On Friday, Evercore ISI made a revision to the price target for Applied Materials (NASDAQ:AMAT), bringing it down to $250 from the previous $260, while keeping an Outperform rating on the stock.

The firm cited valuation as a key factor, noting that Applied Materials is trading at a next twelve months (NTM) price-to-earnings (P/E) ratio of 19x, which is a 6% discount compared to the S&P 500 Index.

This valuation stands out against competitors like LRCX and KLAC, which are trading at a 2% discount and a 13% premium to the S&P 500, respectively.

Evercore ISI highlighted the attractiveness of Applied Materials' valuation and anticipates an expansion in the company's P/E ratio as the market recognizes the positive fundamentals within the industry. The analyst firm has modeled a three-year earnings per share (EPS) power of $14 for Applied Materials and suggests that the new price target represents a 35% upside potential.

The revision follows Applied Materials' recent financial performance, where the company reported October quarter 2024 revenues of $7.05 billion, marking a 4% quarter-over-quarter and 5% year-over-year increase. This revenue beat the consensus estimates by 130 basis points.

Additionally, gross margin (GM) and operating margin (OpM) figures stood at 47.5% and 29.3%, respectively, slightly surpassing the consensus by 10 and 20 basis points. The non-GAAP EPS for the quarter was $2.32, exceeding consensus by $0.13 or 6%.

However, the January quarter revenue guidance was set at $7.15 billion at the midpoint, which is 100 basis points below the consensus, implying a 1.5% quarter-over-quarter and 7% year-over-year growth.

Despite the revenue miss, the gross margin outlook of 48.4% is 80 basis points higher than consensus, and the operating expenses forecast of $1.33 billion is 150 basis points above consensus. The EPS guidance of $2.29 is $0.02 or 1% above the consensus estimates.

In other recent news, Applied Materials Inc (NASDAQ:AMAT). reported a record-breaking performance in fiscal 2024, marking the fifth consecutive year of revenue and earnings growth. The company reported net sales of $27.2 billion, a 2.5% increase from the previous year, and non-GAAP earnings per share (EPS) rose by 7.5% to $8.65.

Deutsche Bank (ETR:DBKGn), however, has maintained a cautious outlook for the company and adjusted the price target for Applied Materials shares to $200, down from the previous $220, while maintaining a Hold rating on the stock.

Deutsche Bank's stance was influenced by mixed near-term spending in the wafer fabrication equipment sector and a decrease in the revenue contribution from China to Applied Materials. Despite these concerns, Applied Materials anticipates revenue growth in Q1 2025, expecting $7.15 billion in revenue and non-GAAP EPS of $2.29.

The company also returned over $5 billion to shareholders through dividends and share repurchases. These recent developments underline the ongoing changes within Applied Materials and the semiconductor industry as a whole.

InvestingPro Insights

Adding to Evercore ISI's analysis, InvestingPro data provides further context on Applied Materials' financial position. The company's market capitalization stands at $153.34 billion, reflecting its significant presence in the semiconductor industry. With a P/E ratio of 21.3 over the last twelve months, AMAT is trading at a premium compared to its earnings, which aligns with Evercore's observation of a 19x NTM P/E ratio.

InvestingPro Tips highlight that Applied Materials has raised its dividend for 7 consecutive years, demonstrating a commitment to shareholder returns. This is particularly noteworthy given the company's strong financial performance and industry position. Additionally, AMAT is recognized as a prominent player in the Semiconductors & Semiconductor Equipment industry, which supports Evercore's positive outlook on the company's fundamentals.

The company's revenue for the last twelve months reached $26.85 billion, with a modest growth of 1.17%. This figure corresponds with the recent quarterly results discussed in the article. AMAT's gross profit margin of 47.41% closely matches the reported 47.5% for the October quarter, indicating consistent profitability.

For investors seeking more comprehensive analysis, InvestingPro offers 12 additional tips that could provide deeper insights into Applied Materials' investment potential.

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