Key Takeaways:
- The 2-Minute Valuation Model values Applied Materials at $187/share in 2 years.
- That’s a potential 29% upside from the stock’s current price of around $145/share.
- Applied Materials is trading near its 52-Week Low, which means now could be a good time to buy the long-term compounder.
- Get accurate financial data on over 100,000 global stocks for free on TIKR >>>
Applied Materials might not get the same headlines as NVIDIA or AMD, but it plays an important behind-the-scenes role in powering the entire semiconductor industry.
As one of the world’s largest suppliers of equipment used to manufacture chips, the company is positioned to benefit from the long-term growth in technology over the next decade.
Despite the company’s dominance and consistent 25%+ returns on invested capital, the stock still trades at a reasonable valuation multiple, and today, analysts believe the stock could have nearly 40% upside.
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What is the 2-Minute Valuation Model?
Three core factors drive a stock’s long-term value:
- Revenue Growth: How big the business becomes.
- Margins: How much the business earns in profit.
- Multiple: How much investors are willing to pay for a business’s earnings.
Our 2-Minute Valuation Model uses a simple formula to value stocks:
Expected Normalized EPS * Forward P/E ratio = Expected Share Price
Revenue growth and margins drive a company’s long-term normalized earnings-per-share (EPS), and investors can use a stock’s long-term average P/E multiple to get an idea of how the market values a company.
Why Applied Materials Looks Undervalued
Forecast
Analysts expect that $AMAT will increase earnings per share in the high-single-digits over the next 3 years to reach just over $11/share in 2027.
It’s likely the business could see much more erratic earnings growth over the next 3 years based on the cyclical nature of the semiconductor industry, but earnings are still expected to see decent growth:
In our valuation, we’ll estimate that earnings will reach about $11/share in 2027.
This earnings growth is likely to be driven by:
- Global demand for AI chips is creating strong tailwinds for semiconductor equipment suppliers.
- The company is continuing to expand its services and subscription business, creating more recurring revenue.
- Cost discipline and supply chain efficiency are supporting margins.
- Government incentives (like the U.S. CHIPS Act) are encouraging new fabs, which helps to boost long-term order visibility.
View Applied Material’s full analyst estimates >>>
Valuation Multiple
Applied Materials has averaged a forward P/E multiple of about 18x over the past 5 years, as shown in the historical P/E chart below.
And just as recently as July of 2024, the stock traded at a forward P/E multiple of about 29.
Today, the stock trades at about 15.5 times forward earnings. It’s historically cheap!
We’ll use a 17x P/E multiple in our valuation because this is in line with the stock’s average historical multiple, and it’s a pretty reasonable multiple considering the business is expected to see high-single-digit annual earnings growth.
Fair Value
Using our 2-Minute Valuation Model and applying a conservative approach:
- Conservative 2027 EPS estimate: $11
- Conservative forward P/E multiple: 17x
Expected Normalized EPS ($11) * Forward P/E ratio (17x) = Expected Share Price ($187)
The 2-year expected share price we would get from this valuation is $187/share.
This would mean that the stock is well undervalued today, considering that the stock today trades at about $145/share.
The stock could have a 29% potential upside over the next 2 years, which would be nearly 14% annualized returns:
Keep in mind, this is just a valuation exercise, and we don’t know for sure what the stock’s price will be in the future.
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Analysts’ Price Target
Today, analysts have an average price target of about $205/share for Applied Materials.
That means the 33 analysts covering the stock see even more upside for the stock than we did with our simple 2-Minute Valuation Model.
Analysts see just over 40% upside for Applied Materials stock:
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Risks to Consider
While our valuation and analysts’ price targets suggest that Applied Materials is undervalued, investors should be aware of several risks:
- Semiconductor demand is cyclical, and a downturn in chip production could delay equipment orders.
- Rising interest rates or macro slowdowns may affect capital spending from customers.
- The company is facing increasingly tough competition from global peers like ASML and Lam Research.
- Supply chain disruptions or export restrictions could impact production and delivery timelines.
- The stock’s valuation may be sensitive to any delays in large-scale AI infrastructure rollouts.
TIKR Takeaway
Applied Materials looks like a high-quality business that’s well-positioned to benefit from long-term semiconductor growth.
The stock could deliver 14% annualized returns over the next 2 years due to the company appearing to be temporarily undervalued.
Is Applied Materials a buy over the next 24 months? Use TIKR to check the stock’s 5-year growth forecasts and other financial metrics to see if the tech stock looks undervalued today.
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Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. Our analysis might not include recent company news or important updates. TIKR has no position in any stocks mentioned. Thank you for reading, and happy investing!
