* We are lifting our price target on Applied Materials to $240 from $225, but upside to that new target keeps our Two rating intact.
* Applied reported better than expected April quarter results, but guidance for the current quarter bookended consensus expectations.
* We continue to see Applied’s semi-cap business benefitting from reshoring and rising semiconductor industry capacity utilization levels.
In response to Applied Materials (AMAT) reporting April quarter results that topped consensus expectations, we are lifting our price target to $240 from $225. While Applied’s revenue was flat compared to the year-ago quarter, it was modestly ahead of consensus expectations but like other companies in the portfolio, Applied delivered nice margin improvement compared to the year-ago quarter.
That paired with $820 million or 4.1 million shares repurchased during the quarter led to the upside surprise for its bottom line. And to be clear, the buyback was a modest contributor to the year-over-year increase in EPS of $2.09 for the quarter vs. $2.00 in the year-ago one and the $1.99 consensus.
As one might suspect, management once again discussed the drivers of rising chip demand that range from AI and data center to IoT, electric vehicles, and greater connectivity. It also touted its competitive position for semi-cap equipment in leading-edge logic; compute memory or high-performance DRAM; DRAM stacking technology, referred to as high-bandwidth memory (HBM); and advanced packaging to connect the logic and memory chips.
Management also rattled off data from TechInsights pointing to Applied growing faster than the wafer fab equipment market for the fifth year in a row last year.
Those factors along with the global reshoring of chip capacity are the reasons why we first added AMAT shares to the portfolio, and they are why we continue to own the shares. Dividends are another reason and to be candid, the share buyback program is nice to have but not a reason, in our view, to buy a stock.
All told, the Applied story is tracking, but as we noted, the company’s focus on cost despite continuing to invest in next-gen technology is driving margins higher. That is prompting our price target increase discussed above. We see that translating into even greater profit and EPS generation as rising chip capacity utilization levels drive incremental chip equipment demand and the impact of reshoring spending, like the US CHIPs Act, kicks in.
Ahead of that inflection point, which looks to be a 2H 2024 event and should reignite revenue and EPS growth, we’ll look to revisit our Two rating for AMAT shares.
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At the time of publication, TheStreet Pro Portfolio was long AMAT.