On Friday, Susquehanna maintained a Neutral rating on Applied Materials (NASDAQ:AMAT) but increased its price target to $160 from $138. The adjustment follows Applied Materials' recent financial performance, which has been bolstered by strong shipments to China. The company's revenue from China soared by 42% year-over-year in the calendar year 2023, contributing to about half of the Semiconductor Systems Group (SSG) revenue, despite SSG's overall revenue remaining relatively unchanged from the previous year.
The semiconductor equipment supplier's January quarter revenue outperformed consensus estimates, leading to a gross margin (GM) and operating margin (OM) beat. Notably, the revenue mix from China in the January quarter constituted 45% of the total and 61% of SSG revenue. This trend is anticipated to continue into the April quarter. Applied Materials has indicated that the China revenue mix is expected to normalize to around 35-40% of total revenues in the second half of the calendar year 2024. Nevertheless, this normalization could result in a 120 basis points GM headwind due to the region's higher GM contribution.
The company's commentary on Wafer Fabrication Equipment (WFE) aligned with Susquehanna's forecasts, highlighting the strength in leading-edge technology. This includes the Gate-All-Around (GAA) technology, which is predicted to create an additional $1 billion opportunity for every 100,000 wafer starts. Moreover, the revenue from Backside Power and Chemical Fluid Elimination (CFE) system is expected to quadruple in the calendar year 2024. High Bandwidth (NASDAQ:BAND) Memory (HBM) packaging revenue is also projected to grow approximately fourfold in fiscal year 2024, reaching nearly half a billion dollars, while advanced packaging is estimated to reach about $1.5 billion.
Despite these positive trends, Susquehanna's stance on Applied Materials remains cautious due to the stock trading at a 10-year high forward price-to-earnings (PE) ratio. The firm's updated earnings per share (EPS) estimates for fiscal years 2024 and 2025 stand at $8.07 and $8.73, respectively, compared to the consensus estimates of $7.77 and $9.04.
InvestingPro Insights
Applied Materials (NASDAQ:AMAT) has been a focal point for investors given its impressive performance, particularly in the Chinese market. Delving into the details, InvestingPro data reveals a substantial market capitalization of $165.74 billion, underscoring the company's significant presence in the semiconductor industry. The P/E ratio, a key indicator of market expectations, stands at 22.08, which suggests a premium valuation compared to near-term earnings growth. This aligns with Susquehanna's observation regarding the stock's high forward P/E ratio. However, the company's robust financial health is further highlighted by a gross profit margin of 46.98% over the last twelve months as of Q1 2024, which indicates strong profitability.
From an investor's perspective, Applied Materials has demonstrated commendable fiscal discipline and shareholder value, as evidenced by an InvestingPro Tip that the company has consistently raised its dividend for 6 consecutive years. Additionally, the firm has maintained dividend payments for 20 consecutive years, which can be particularly appealing for income-focused investors. Another InvestingPro Tip notes that Applied Materials is trading near its 52-week high, reflecting investor confidence and market momentum. For those looking to delve deeper into the company's performance and potential investment opportunities, more insights are available, with InvestingPro offering an additional 15 tips for Applied Materials.
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