Shares of AMAT Are on Sale - Consider the Risk.

One of the biggest losers as of today's afternoon session is farm & heavy construction machinery company Applied Materials, whose shares are down -4.1%, underperforming the Nasdaq by -4.0%.
At $148.44, AMAT is not far from its average analyst target price of $146.53.

The average analyst rating for the stock is buy. AMAT underperformed the S&P 500 by -4.0% so far today, but outpaced the index by 27.0% over the last year with a return of 42.0%.

Applied Materials's trailing 12 month P/E ratio is 19.6, based on its trailing EPS of $7.58. The company has a forward P/E ratio of 18.0 according to its forward EPS of $8.24 -- which is an estimate of what its earnings will look like in the next quarter. The average trailing Price to Earnings (P/E) ratio of US-based technology companies is 27.16 as of first quarter of 2023. In contrast, the S&P 500 average is 15.97. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead).

We can take the price to earnings analysis one step further by dividing the P/E ratio by the company’s projected five-year growth rate, which gives us its Price to Earnings Growth, or PEG ratio. This ratio is important because it allows us to identify companies that have a low price to earnings ratio because of low growth expectations, or conversely, companies with high P/E ratios because growth is expected to take off.

Applied Materials's PEG ratio of 1.88 indicates that its P/E ratio is fair compared to its projected earnings growth. In other words, the company’s valuation accurately reflects its estimated growth potential. The caveat, however, is that these growth estimates could turn out to be inaccurate.

To understand a company's long term business prospects, we must consider its gross profit margins, which is the ratio of its gross profits to its revenues. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost. After looking at its annual reports, we obtained the following information on AMAT's margins:

Date Reported Revenue ($ k) Cost of Revenue ($ k) Gross Margins (%) YoY Growth (%)
2023 26,543,000 14,227,000 46 -2.13
2022 25,785,000 13,792,000 47 0.0
2021 23,063,000 12,149,000 47 4.44
2020 17,202,000 9,510,000 45 2.27
2019 14,608,000 8,222,000 44 0.0
2018 17,253,000 9,188,000 44
  • Average gross margin: 45.5%
  • Average gross margin growth rate: 0.9%
  • Coefficient of variability (higher numbers indicating more instability): 5.5%

While not the strongest, Applied Materials's gross margins indicate that its underlying business is viable, and that the stock is potentially worthy for investment -- as opposed to speculative -- purposes.

Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Applied Materials's last four annual reports, we are able to obtain the following rundown of its free cash flow:

Date Reported Cash Flow from Operations ($ k) Capital expenditures ($ k) Free Cash Flow ($ k) YoY Growth (%)
2023 8,002,000 1,020,000 6,982,000 51.39
2022 5,399,000 787,000 4,612,000 -3.39
2021 5,442,000 668,000 4,774,000 41.16
2020 3,804,000 422,000 3,382,000 20.53
2019 3,247,000 441,000 2,806,000 -11.34
2018 3,787,000 622,000 3,165,000
  • Average free cash flow: $4.29 Billion
  • Average free cash flow growth rate: 14.1%
  • Coefficient of variability (the lower the better): 166.0%

With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in AMAT have received an annualized dividend yield of 0.7% on their capital.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts. As of the first quarter of 2023, the average P/B ratio for technology companies is 6.23. In contrast, the average P/B ratio of the S&P 500 is 2.95. Applied Materials's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 8, so it's likely that equity investors are over-valuing the company's assets.

As of first quarter of 2023, Applied Materials is likely fairly valued because it has a lower P/E ratio than its sector average, an elevated P/B ratio, and generally positive cash flows with an upwards trend. The stock has strong growth indicators because of its decent operating margins with a stable trend, and an above average PEG ratio. We hope this analysis will inspire you to do your own research into AMAT's fundamental values -- especially their trends over time.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.