Advancements In AI And Emerging Technologies Will Strengthen Future Market Position

Key Takeaways

• Anticipated growth from AI and innovations in device architecture could significantly increase total available market and positively impact revenues.
  
• Leadership in emerging technologies and integrated solutions positions Applied Materials for market share gains, boosting revenue and optimizing earnings.
  
• Reliance on China amidst trade restrictions and local competition poses revenue growth challenges, with execution risks in scaling technologies impacting future margins.

Catalysts

Engages in the provision of manufacturing equipment, services, and software to the semiconductor, display, and related industries.

• Applied Materials is anticipating strong growth from AI-driven demand, with innovations in device architecture (such as gate-all-around transistors and backside power delivery) projected to increase their total available market by more than 15%. This should significantly impact revenues positively.
  
• Advancements in semiconductor technologies are expected to enhance energy efficiency and reduce costs, notably within AI data centers. Such innovations can drive system-level cost reductions, potentially increasing net margins over time.
  
• The company's leadership in emerging technologies like high-bandwidth memory, advanced packaging, power electronics, and silicon photonics positions them advantageously for future market share gains, likely bolstering revenues.
  
• The development and commercialization of integrated technology solutions, such as the hybrid bonding interconnect system, are expected to create high-value opportunities for Applied Materials by addressing complex device challenges, thus enhancing their revenue and market position.
  
• Applied's strategy of high-velocity co-innovation through ecosystem collaborations and R&D efficiencies aims to accelerate technology deployment, optimizing both R&D expenditures and potentially increasing their earnings by capturing more value through faster technology integration.

Applied Materials Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Applied Materials's revenue will grow by 6.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 23.0% today to 26.8% in 3 years time.
• Analysts expect earnings to reach $8.9 billion (and earnings per share of $11.19) by about March 2028, up from $6.3 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $7.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.6x on those 2028 earnings, up from 19.9x today. This future PE is lower than the current PE for the US Semiconductor industry at 30.1x.
• Analysts expect the number of shares outstanding to decline by 2.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.63%, as per the Simply Wall St company report.

Applied Materials Future Earnings Per Share Growth

Risks

• The company's growth prospects may be hindered by its reliance on China, especially given the trade restrictions impacting around $400 million of revenue in fiscal 2025, which could affect overall revenue and service growth.
  
• There is uncertainty in the ICAPS market in China, with changing industry dynamics and investment patterns, leading to less visibility and potential revenue fluctuations.
  
• Increasing competition from local Chinese equipment companies, especially as they gain market share in areas like deposition and etching, could hinder Applied Materials' ability to capture more market share and affect revenue growth.
  
• Trade restrictions are negatively impacting near-term growth, particularly service revenue from China, potentially suppressing earnings as they adapt to new regulations.
  
• Execution risk in scaling and commercializing advanced packaging solutions and maintaining leadership across a range of diverse and innovative technologies could be significant, impacting future margins and earnings if not managed well.

Valuation

• The analysts have a consensus price target of $206.472 for Applied Materials based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $250.0, and the most bearish reporting a price target of just $164.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $33.1 billion, earnings will come to $8.9 billion, and it would be trading on a PE ratio of 22.6x, assuming you use a discount rate of 8.6%.
  
• Given the current share price of $155.68, the analyst price target of $206.47 is 24.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.