Revolutionary Semiconductor Innovations Propel Growth Amidst Market Challenges

Key Takeaways

• Innovations in energy-efficient computing and material science, like gate-all-around transistors, are expected to drive significant semiconductor revenue growth.
  
• Strategic focus on integrated solutions and R&D investments are anticipated to boost margins, market entry speed, and expand recurring service revenues.
  
• Reliance on the Chinese market and expansion into AI-driven DRAM face risks from geopolitical tensions, technology competition, and economic uncertainties impacting revenue stability and growth.

Catalysts

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

• Applied Materials is expecting significant growth in semiconductor systems revenue from energy-efficient computing and innovations in material science, driven by key inflections such as gate-all-around transistors and backside power distribution, which will increase their available market from $12 billion to approximately $14 billion per 100,000 wafer starts per month of capacity, impacting future revenue growth.
  
• The company's strategic focus on integrated solutions, which currently accounts for around 30% of its semiconductor systems revenue, is expected to become a more significant revenue driver as they enable architectural evolutions in semiconductor production, positively impacting revenue and margins.
  
• Applied Materials' investment in the EPIC R&D platform aims to accelerate the commercialization of next-generation technology, potentially leading to faster market entry and increased revenue from innovations.
  
• In services, the company is experiencing double-digit growth, supported by high renewal rates and expanding long-term agreements, which provide recurring revenue and enhance earnings sustainability.
  
• Applied Materials aims to grow its addressable market and capture a larger share of the process equipment spending in the DRAM segment and advanced packaging due to increased demand for High-Bandwidth Memory (HBM) and expanded advanced packaging capabilities, potentially boosting revenues significantly.

Applied Materials Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Applied Materials's revenue will grow by 7.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 26.4% today to 26.8% in 3 years time.
• Analysts expect earnings to reach $9.1 billion (and earnings per share of $11.26) by about November 2027, up from $7.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $10.4 billion in earnings, and the most bearish expecting $7.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.7x on those 2027 earnings, up from 19.4x 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 0.57% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.2%, as per the Simply Wall St company report.

Applied Materials Future Earnings Per Share Growth

Risks

• The reliance on the Chinese market, which represented 30% of their revenue, faces uncertainty due to geopolitical tensions and regulatory changes, potentially affecting both revenue stability and margins.
  
• Investment risks associated with the aggressive expansion into AI-driven DRAM and the gate-all-around nodes may not deliver expected returns, impacting revenue growth projections if these markets do not mature as anticipated.
  
• Competition and technology risks, particularly in the high-intensity lithography segments, could lead to lower market share or pricing pressures, ultimately affecting revenue and profit margins.
  
• Operational complexities and increased costs associated with developing advanced packaging technologies and meeting sustainability goals could pressure net margins if not managed effectively.
  
• Potential fluctuations in capex spending from major clients, combined with uncertainties in broader economic conditions, could impact earnings predictability and profitability in the coming years.

Valuation

• The analysts have a consensus price target of $219.26 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 $155.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $34.0 billion, earnings will come to $9.1 billion, and it would be trading on a PE ratio of 24.7x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of $169.31, the analyst's price target of $219.26 is 22.8% 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.