The last three days have marked the market’s biggest three-day drop since March, when coronavirus-driven shutdowns brought the global economy to a screeching halt and sent the market plunging to bear market levels in less than a month. For many analysts, myself included, the drawdown has been long overdue, as all three major market indices recovered the entire distance of their bear market plunges in record time. The biggest winner during the rally has been the Tech sector, where a number of stocks not only recovered their pre-pandemic highs but even surged to entirely new highs as investors piled into just about anything with even a tangential relationship to the global business shift to remote, cloud-based operations.
This is a shift is one of the most interesting economic trends of the year that has helped keep much of the corporate world going. Many companies have transitioned all or at least the majority of their business operations – at least, in “white-collar” areas where employees don’t have to be on-site – to remote, telecommuting functions. While unemployment has remained high, shifting major portions of the workforce to a telecommuting model has also saved millions of jobs and helped to keep a lot of other businesses running. That is part of the reason that companies that provide remote technology products and solutions have seen big increases in price over the last month. It has also spurred a sizable boost for businesses tied to streaming services. As you drill down, that doesn’t just mean the Netflixes or Amazons of the tech world, but it also means that companies on the production and supply side of those solutions – including semiconductors, which are generally very sensitive to economic downturns – have been favorably positioned.
In the semiconductor space, I like to pay attention not just to the producers – Intel, Advanced Micro Devices, Samsung Electronics, and so on – but also the companies that provide solutions and services to aid their production. That means equipment makers, like Applied Materials Inc. (AMAT) are always of interest. AMAT has been among the star performers after hitting a bear market low at around $36 in March – it more than doubled in price from that point until it touched $70 in mid-August – matching its February high before the pandemic took hold. From that point, the stock has dropped back a little over -18%, and could be reaching a useful level to find support and begin consolidating, which could lead to a useful new buying opportunity. What about AMAT’s fundamentals? How has the company navigated the troubled waters of the global economy during the last several months, and with those fundamentals in mind, does the stock’s current price drop translate to a useful value? Let’s dive in to find out.
Fundamental and Value Profile
Applied Materials, Inc. provides manufacturing equipment, services and software to the global semiconductor, display and related industries. The Company’s segments are Semiconductor Systems, which includes semiconductor capital equipment for etch, rapid thermal processing, deposition, chemical mechanical planarization, metrology and inspection, wafer packaging, and ion implantation; Applied Global Services, which provides integrated solutions to optimize equipment and fab performance and productivity; Display and Adjacent Markets, which includes products for manufacturing liquid crystal displays, organic light-emitting diodes, upgrades and roll-to-roll Web coating systems and other display technologies for televisions, personal computers, smart phones and other consumer-oriented devices, and Corporate and Other segment, which includes revenues from products, as well as costs of products sold for fabricating solar photovoltaic cells and modules, and certain operating expenses. AMAT has a current market cap of $52.2 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased by a little over 43%, while sales improved by about 23.4%. That strong pattern was also seen in the last quarter; earnings increased 19% and sale rose 11%. That earnings patterns reflected, at least in part, generally improving conditions in the memory market, where oversupply had previously been a big concern. The company’s margin profile is impressive; Net Income versus Revenue was 19.5% in the last quarter, and 19.1% over the last twelve months. That is a good indication that the company’s profitability has remained healthy even as management dealt with pandemic-prompted difficulties.
Free Cash Flow: AMAT’s Free Cash Flow is strong, at almost $2.9 billion. While this number declined from about $7 billion at the beginning of 2018, it is also up from around $2.5 billion at the end of 2018. It also translates to a Free Cash Flow Yield of 5.31%.
Debt to Equity: AMAT has a debt/equity ratio of .57, which is conservative, and implies debt management shouldn’t be a problem. The company has nearly $4.7 billion in cash and liquid assets, which means they they have plenty of liquidity, against $5.4 billion in total long-term debt.
Dividend: AMAT pays an annual dividend of $.88 per share – an improvement from $.80 in 2019 – and which, at its current price translates to a dividend yield of about 1.44%.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $47.80 per share. That means that AMAT is overvalued, with about -16% downside from its current price. It also puts a bargain price for the stock at around $38.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above covers the last year of price activity. The red line traces the stock’s rally from its bear market low in March to its mid-August high around $70. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. From that August high, the stock began to retrace back to about $62 in the early part of last week. The selloff in the stock is currently accelerating and has pushed the stock down to the 38.2% retracement line at about $57, which should provide a good level for investors to use to buy the stock and act as support. If it can pivot and start to move higher, it could rally to somewhere between $62 and $64 before finding new resistance. A drop below $57, however could see the stock drop to around $53, in line with the 50% retracement line before finding new support.
Near-term Keys: If you prefer working with short-term, momentum-based trades, the stock’s current price action could provide some useful opportunities. Use a pivot low off of $57 as a signal to buy the stock or work with call options, with a nice exit point for a quick-hit gain at around $62. If the stock drops below $57, you can think about shorting the stock or buying put options, with an eye on $53 as a useful bearish target. What about the value proposition? AMAT’s fundamentals look pretty solid; but given the stock’s current overvalued status, it is probably smart to wait to see what kind of effect the market’s current bearish momentum will have on the stock’s broader trends before making a decision about the stock’s usefulness as a long-term investment. A drop below $40 could be enough to make the stock start to look very interesting on a valuation basis.