Applied Materials Inc.

Investment Analysis

Analyst: Tommaso T. Bartolozzi

Reviewer: Paolo Gatto

Ticker: AMAT

Date: 20/02/2025

Current Price: $ 171,98

Sector: Electronic Components and Manufacturing

Industry: Semiconductor Front End Processing Equipment

CEO: Gary Dickerson

Avg. Target Price: $ 209,87

Analyst opinion: BUY

Business Overview

Applied Materials, Inc. provides manufacturing equipment, services, and software for the semiconductor, display, and related industries. The company operates through the following segments: Semiconductor Systems, Applied Global Services, and Display & Adjacent Markets. The Semiconductor Systems segment includes semiconductor equipment used in etching, rapid thermal processing, deposition, chemical mechanical planarization, metrology and inspection, wafer packaging, and ion implantation processes. The Applied Global Services segment offers solutions to optimize equipment, performance, and productivity. The Display & Adjacent Markets segment provides products for the manufacturing of liquid crystal displays (LCDs), organic light-emitting diodes (OLEDs), equipment upgrades, and other display technologies for TVs, monitors, laptops, personal computers, smartphones, and other consumer-oriented devices.

Products and services

Semiconductor Systems
This segment focuses on providing advanced equipment for semiconductor manufacturing, covering various stages of the chip fabrication process. The main technologies and products include:

Material Deposition: Techniques such as Chemical Vapor Deposition (CVD) and Physical Vapor Deposition (PVD) to apply thin layers of materials onto silicon wafers.
Etching: Processes to selectively remove materials, creating the necessary structures on semiconductor devices.
Rapid Thermal Processing (RTP): Technologies to modify material properties through controlled thermal cycles.
Chemical Mechanical Planarization (CMP): Processes that combine chemical and mechanical actions to smooth and flatten the wafer surface.
Metrology and Inspection: Tools to accurately measure device characteristics and identify potential defects.
Ion Implantation: Techniques to introduce controlled impurities into semiconductors, altering their electrical properties.

Applied Global Services
This segment offers a comprehensive range of services designed to optimize the performance and productivity of customers’ equipment. The main services include:

Installation and Support: Assistance with the installation of new equipment and support during production ramp-up.
Preventive and Corrective Maintenance: Maintenance programs to ensure optimal equipment operation and rapid response to malfunctions.
Upgrades and Enhancements: Solutions to update existing equipment, improving performance and extending its useful life.
Automation Software: Software tools for automating and optimizing production processes.

Display & Adjacent Markets
This segment focuses on providing solutions for the display industry and related markets. The main offerings include:

Equipment for Liquid Crystal Displays (LCDs): Systems for manufacturing LCDs used in televisions, monitors, and other devices.
Technologies for Organic Light-Emitting Diodes (OLEDs): Solutions for producing OLED displays, known for superior image quality and flexibility.
Equipment Upgrades: Services to improve the performance of existing production lines by integrating the latest technological innovations.
Other Display Technologies: Products for manufacturing advanced displays used in various consumer devices, including smartphones, laptops, and tablets.

Market Share

In the global semiconductor wafer fabrication equipment market, Applied Materials stands out as the leader, with a market share of 20%. This prominent position is followed by ASML, which primarily focuses on lithography equipment, and Lam Research, known for its solutions in etching and deposition processes. These three key players dominate the sector, making significant contributions to innovation and efficiency in the semiconductor production stages.

Source: Statista Report

Geographic Revenues

The majority of Applied Materials (AMAT)‘s revenue, amounting to 80.6%, comes from sales in Asia, with a significant concentration in China, which represents one of the main markets for semiconductor manufacturing equipment. This reflects the strategic importance of the Asian region, where the demand for advanced chip manufacturing technologies is continuously growing. In comparison, the American market contributes much less, with only 14% of total global sales. This disparity highlights the strong competitiveness and dynamism of the Asian market, where China and other emerging economies are leaders in adopting semiconductor technologies, while the United States, though a key market, accounts for a relatively smaller portion of total revenue.

Source: Factset
Source: Factset

Segment analysis

Financials

Balance Sheets

Assets Overview

Current assets account for approximately 61% of total assets, amounting to $21 billion out of a total of $34 billion. These are primarily composed of liquid assets, which represent about 45% of current assets and have increased by 38% compared to the previous year. There is also a notable presence of inventory, which makes up 25.5% of current assets; historically, this item has remained within a range of 15% to 20% of total assets.

The goodwill figure is also significant, accounting for approximately 11% of total assets. It is worth noting that this value is well covered by shareholders’ equity, highlighting the company’s strong financial position.

Liabilities Overview

Applied Materials (AMAT) has long-term debt of $5.7 billion, accounting for 16% of total liabilities. This figure has remained stable over the past ten years, highlighting the company’s prudent debt management and limited need to rely on financial leverage. The consistency of this debt level reflects AMAT’s ability to support its investments and operations through strong operating cash flows, thus maintaining financial flexibility without exposing itself to excessive risk.

Liquidity and Solvency Analysis

Quick Ratio = 2.51x

The most liquid current assets (such as cash, receivables, and other easily convertible resources) are more than sufficient to cover current liabilities. A value greater than 1 indicates a strong ability to meet short-term obligations without relying on inventory, and in this case, AMAT has a substantial liquidity cushion.

Coverage Ratio = 1.97x

The financial situation appears balanced. Long-term resources (equity and long-term debts) cover long-term liabilities and fixed assets, with no signs of significant financial imbalances.

Debt Sustainability

Total Debt/EBITDA = 0.76

The level of debt is relatively low compared to its operating earnings. In practice, if the company decided to use its entire EBITDA to repay its debts, it would be able to do so in less than a year. This value suggests a strong ability to generate sufficient operating cash flows to cover its debts without compromising its financial stability. Furthermore, such a low Total Debt/EBITDA ratio can be seen as a positive indicator for investors, as it suggests that the company is not overly exposed to debt-related risks and has a significant margin of safety in managing its financial obligations.

EBITDA/Int. Expenses = 33.44

Applied Materials can generate operating income significantly higher than the financial costs arising from its debt. In other words, the company’s EBITDA is more than 33 times greater than its interest expenses.

In general, the level of debt of Applied Materials is not a cause for concern. The company has maintained a balanced financial structure, with a debt/EBITDA ratio that suggests a strong ability to cover its financial obligations through solid operating earnings. This, combined with its high EBITDA/Interest Expenses, highlights a prudent approach to debt management, allowing AMAT to face potential financial challenges without compromising its stability. Therefore, despite having debt, the company’s financial situation remains strong and does not raise immediate concern for investors.

Income Statement

Revenues

The revenue growth of Applied Materials is steady and strong. In the last year, it reached over $27 billion dollars, with an increase of 2.73% compared to the previous year. Since 2005, the company has recorded a CAGR of 7.4%, while in the last 10 years, the growth has been more significant, with an annual rate of about 13%. Although these figures are slightly lower than some competitors, they still reflect consistent organic growth and effective management.

Source: tradingview

Gross Income/Margin

In the last year, Applied Materials recorded a cost of goods sold of 14.2 billion dollars, generating a gross income of nearly 13 billion dollars, which represents 47% of revenue. This figure marks a 4.6% increase compared to the previous year. Historically, this is one of the years with the highest gross margins for the company, although margins have typically hovered around 40% in previous years.

R&D

For a company like Applied Materials, the Research and Development (R&D) division is crucial for several reasons, but primarily for maintaining competitiveness. Given the rapidly evolving sector in which it operates, it is essential for the company to keep up with technological advancements, or else it risks having its solutions become obsolete and losing market share.

Historically, AMAT has allocated between 10% and 17% of its revenue to R&D activities. In the last year, its investment in research and development was 11.9%, or approximately 3.2 billion dollars. Although these figures are slightly lower than its main competitors, they still represent a positive outcome, demonstrating the company’s commitment to innovation and maintaining its leadership position in the industry.

EBITDA and Net Income

Applied Materials closed the last year with strong financial results, reporting an EBITDA of $8 billion and a Net Income of $7 billion. The EBITDA margin, at approximately 30%, is in line with its main competitors in the industry, reflecting efficient operational management. Furthermore, the company reported a 10-year CAGR (compound annual growth rate) of 17%, indicating consistent and sustainable growth in its operational performance.

Regarding the net income margin, Applied Materials recorded a margin of 26% of revenue, also in line with its direct competitors. Additionally, the CAGR of net income over the past 10 years stood at 23.5%, a particularly high rate that demonstrates the company’s ability not only to increase revenues but also to effectively manage its expenses, significantly enhancing profitability over the long term.

Source: tradingview

Cash Flow Statement

Operating Activities

The operating cash flows of Amat have shown stable and consistent growth over time. In the last year, the company generated a Net Operating Cash Flow of $8.6 billion. In recent years, Amat has increased its working capital, a signal that may reflect a rise in liquidity and growth in the current assets required to support the expansion of its operations. However, the increase in working capital does not appear to be significant enough to suggest inefficiencies in cash flow management. Therefore, it can be concluded that the company is managing its liquidity properly, without any evident issues in its operational management.

Investing Activities

In recent years, Amat’s capital expenditures have seen a significant increase, rising from -$787 million to -$1,190 million, a jump that reflects a greater commitment to long-term asset investments. This rise in capital expenditures can be interpreted as a strategy aimed at enhancing production capacity, improving technology, or expanding business operations to support future growth.

Specifically, in the last year, the company made investments totaling $1.137 billion, a substantial figure that highlights Amat’s approach to strengthening its position in the sector.

Free Cash Flow

In the last year, AMAT generated a free cash flow (FCF) of nearly $7.5 billion, marking significant growth compared to 2022. This result highlights a Compound Annual Growth Rate (CAGR) of free cash flow of 19% over the last 10 years, demonstrating a strong long-term performance. Although AMAT’s FCF value is lower than some direct competitors, the company has managed to maintain consistent and sustainable growth over time. This relatively stable trend in free cash flow could be interpreted as a sign of prudent management and financial strength, allowing the company to maintain positive performance even during periods of economic uncertainty or market fluctuations.

Source: tradingview

Margins, Ratios and Multiples

Margins

Gross Margin (%): 47.7% → In line with the average (48.8%), but lower than KLA (60.5%) and ASML (51.1%).
EBIT Margin (%): 29.2% → In line with the average (27.0%), but lower than KLA (40.2%) and Lam Research (29.7%).
EBITDA Margin (%): 30.7% → Slightly above the average (29.6%), but lower than KLA (43.9%) and ASML (34.1%).
Net Margin (%): 23.0% → In line with the average (22.7%).
Free Cash Flow (FCF) Margin (%): 21.5% → Higher than the average (18.5%), showing strong liquidity generation capability.

Ratios

ROA (%): 19.6% → Above the average (17.4%), demonstrating good asset utilization efficiency.
ROE (%): 35.2% → Below the average (44.5%), but still a strong figure.
ROIC (%): 26.7% → Below the average (31.6%), but still a solid return on investments.
Return on Total Capital (%): 33.2% → Above the average (27.1%), indicating a good return on investments.

Multiples

EV/EBITDA (x): 16.69x → Below the average (18.66x), suggesting a lower valuation relative to EBITDA compared to competitors.
P/BV (x): 7.68x → Below the average (11.62x), indicating AMAT is less expensive in terms of book value compared to its competitors.
P/E (x): 23.03x → Below the average (25.30x), with a relatively lower valuation based on earnings compared to the industry average.
Price to FCF (x): 24.29x → Below the average (37.52x), suggesting AMAT is relatively more affordable in terms of free cash flow multiples compared to competitors.

Source: Factset (Margins, Ratios and Multiples)

Valuation

Discounted Cash Flow

Considering a WACC of 9.54%, a perpetual growth rate of 4.5% (in line with the 25-year revenue CAGR), and an optimistic sales growth scenario, the model suggests that AMAT is moderately undervalued at current prices, with an implied value of $188.12, representing a potential upside of approximately +9.38%.

Using an estimated EBITDA of $19,968.1 million over the next 7 years and applying an EV/EBITDA multiple of 18.66x (the competitors’ average), the implied price amounts to $253.46, indicating a potential increase of about +47.38%.

By considering the average of the two methods, the most plausible estimated price is $220.79, reflecting a hypothetical potential upside of approximately +28.36%.

However, it is important to emphasize that these estimates are based on highly optimistic growth assumptions. Therefore, to ensure a more balanced evaluation, greater weight should be given to the comparable multiples analysis.

Trading Comparables Analysis

By selecting KLA, Lam Research, ASML Holding, Veeco Instruments, and Axcelis Technologies as competitors and using the EV/Revenue, EV/EBITDA, and P/E multiples, the following implied prices for AMAT are obtained:

EV/Revenue: $209.47 → +21.8% (average multiple used: 6.2x)
EV/EBITDA: $199.30 → +15.9% (average multiple used: 19.4x)
P/E: $188.08 → +9.4% (average multiple used: 24.3x)

By considering the average of the three methods, an implied price of $198.95 is reached, corresponding to a potential upside of +15.7%, consistent with the estimates provided by the DCF analysis.

Our Opinion

AMAT is confirmed as one of the key companies in the semiconductor sector. While it shows slightly lower profitability metrics compared to some competitors, we believe it can still deliver strong future performance. Its main strength lies in the diversification of its product and service portfolio: whereas many competitors focus vertically on specific technologies, AMAT adopts a more transversal approach. This strategy allows the company to better respond to growing demand and reach a broader customer base in a rapidly evolving industry.

The valuations also returned positive results, confirming that at current prices, the company appears undervalued relative to its intrinsic value. This, combined with a solid business model and the ability to adapt to different market segments, makes AMAT an appealing company for future prospects.