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Buy Applied Materials (AMAT) Stock Ahead of Q2 2020 Earnings?

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Applied Materials (AMAT - Free Report) stock has outpaced the S&P 500’s climb from the market’s March 23 lows, up 30%. AMAT popped another 5% during regular trading Friday, which might mean Wall Street is anticipating strong results from the semiconductor equipment firm’s Q2 fiscal 2020 earnings that are due out Thursday, May 14.

AMAT’s Story

Applied Materials is a leading semiconductor equipment firm and its offerings help chip makers produce new chips and advanced displays. AMAT executives expect to benefit from the continued expansion of the big data age and project the growth of AI and other new computing technologies will become key longer-term growth drivers. 

Applied Materials is also focused on figuring out what’s next as classic Moore's law scaling slows. This is why the firm has focused on what it calls the new playbook for semiconductor design and manufacturing, which includes five main elements: “New architectures, new devices and 3D structures, new materials, new ways to shrink the feature geometries, and new ways to connect chips together.”

AMAT is still impacted by the historically cyclical chip space. This was reflected in its 2019 results, where its revenue fell roughly 13%, for its first year-over-year downturn since 2013.

But the firm bounced back last quarter, with revenue up 11%. Fellow chip industry players Intel (INTC - Free Report) , Taiwan Semiconductor Manufacturing Co. (TSM - Free Report) , Nvidia (NVDA - Free Report) , and many others also posted solid results last quarter.

CEO Gary Dickerson said at the time that Applied Materials believes it “can deliver strong double-digit growth in our semiconductor business this year as our unique solutions accelerate our customers’ success in the AI-Big Data era.”

 

 

 

 

 

 

 

Outlook

The semiconductor equipment firm’s optimism—it last reported on February 12—came before the coronavirus turned into a global pandemic and brought a ton of economic activity to a halt. AMAT then on March 23 withdrew its Q2 FY20 outlook “because the evolving worldwide response to COVID-19 is impacting the company’s supply chain and manufacturing operations.”

With this in mind, our current Zacks estimates call for AMAT’s second quarter revenue to pop 20% to reach $4.25B billion. This would easily top last quarter’s 11% top-line expansion.

At the bottom end of the income statement, Applied Materials is projected to see its adjusted quarterly earnings surge 31.4% to reach $0.92 a share. Similarly, this would beat Q1’s 21% EPS growth.

AMAT also boasts a strong history of quarterly earnings beats. However, the nearby chart shows that its earnings revisions have trended in the wrong direction amid the uncertainty.

 

 

 

 

 

 

 

Other Fundamentals

Applied Materials stock has outpaced the broader tech industry over the last five years, up 170%. AMAT closed regular trading Friday at $53.81 a share. This puts its 22% below its 52-week highs, which could give it more room to run if it is able to impress Wall Street with its results or guidance.

Meanwhile, AMAT is trading at 2.7X forward 12-month sales estimates, which marks a discount against its own three-year median of 2.9X and its highs during this stretch of 4.2X. The company also presents far more value compared to its industry’s 6.2X average.   

The company also returned roughly $3.2 billion to shareholders through dividends and buybacks in fiscal 2019. AMAT’s dividend yield comes in at 1.64% at the moment, well above the 10-year U.S. Treasury Note’s 0.68% average and its industry’s 1.34%. Its next quarterly dividend will be payable on June 11, to shareholders of record as of May 21.

Bottom Line

Applied Materials is a Zacks Rank #3 (Hold) right now that sports “B” grades for both Value and Momentum in our Style Scores system. Tech stocks from Apple (AAPL - Free Report) to Microsoft (MSFT - Free Report) have also proven resilient during the current earnings season, and AMAT could certainly continue to climb (also read: Is Wall Street Oblivious of Main Street Pain?).

Yet, its industry rests in the bottom 35% of our more than 250 Zacks industries and it withdrew its guidance. Therefore, the more prudent near-term play is to hold off until after Applied Materials reports its second quarter fiscal 2020 financial results on Thursday, May 14. Longer-term investors, on the other hand, might want to consider scooping up a chip industry power that pays a dividend, as it rests 20% off its highs.

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