It's A Story Of Risk Vs Reward With Applied Materials, Inc. (NASDAQ:AMAT)

It's not a stretch to say that Applied Materials, Inc.'s (NASDAQ:AMAT) price-to-earnings (or "P/E") ratio of 19.3x right now seems quite "middle-of-the-road" compared to the market in the United States, where the median P/E ratio is around 18x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

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While the market has experienced earnings growth lately, Applied Materials' earnings have gone into reverse gear, which is not great. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for Applied Materials

Keen to find out how analysts think Applied Materials' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Applied Materials' Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like Applied Materials' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 9.8% decrease to the company's bottom line. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 7.7% in total. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 13% per annum over the next three years. That's shaping up to be materially higher than the 11% each year growth forecast for the broader market.

With this information, we find it interesting that Applied Materials is trading at a fairly similar P/E to the market. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Key Takeaway

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Applied Materials currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Applied Materials with six simple checks on some of these key factors.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.