Applied Materials Inc (AMAT, Financial) has recently experienced a daily loss of -3.69% and a 3-month gain of 21.07%. With an Earnings Per Share (EPS) (EPS) of 7.58, the question arises: is the stock fairly valued? In this article, we delve deep into the valuation analysis of Applied Materials, providing a comprehensive examination of its financial metrics, performance, and future prospects.
A Snapshot of Applied Materials
Applied Materials is the world's largest supplier of semiconductor manufacturing equipment, providing materials engineering solutions to help make nearly every chip in the world. The company's systems are used in nearly every major process step, with the exception of lithography. Key tools include those for chemical and physical vapor deposition, etching, chemical mechanical polishing, wafer- and reticle-inspection, critical dimension measurement, and defect inspection scanning electron microscopes.
The stock price of Applied Materials (AMAT, Financial) currently stands at $139.28 per share, with a market cap of $117 billion. The company's GF Value, an estimation of fair value based on historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates, is $131.3. This implies that the stock is fairly valued.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
We believe the GF Value Line is the fair value that the stock should be traded at. The stock price will most likely fluctuate around the GF Value Line. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
According to GuruFocus Value calculation, the stock of Applied Materials shows every sign of being fairly valued. The long-term return of its stock is likely to be close to the rate of its business growth.
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Financial Strength of Applied Materials
It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Applied Materials has a cash-to-debt ratio of 0.83, which is worse than 67.54% of companies in the Semiconductors industry. The overall financial strength of Applied Materials is 8 out of 10, which indicates that the financial strength of Applied Materials is strong.
Profitability and Growth of Applied Materials
It is less risky to invest in profitable companies, especially those with consistent profitability over the long term. A company with high profit margins is usually a safer investment than those with low profit margins. Applied Materials has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $26.60 billion and Earnings Per Share (EPS) of $7.58. Its operating margin is 29.28%, which ranks better than 92.51% of companies in the Semiconductors industry. Overall, the profitability of Applied Materials is ranked 10 out of 10, which indicates strong profitability.
One of the most important factors in the valuation of a company is growth . Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Applied Materials is23.9%, which ranks better than 75.09% of companies in the Semiconductors industry. The 3-year average EBITDA growth is 32.1%, which ranks better than 61.56% of companies in the Semiconductors industry.
ROIC vs WACC
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Applied Materials's ROIC was 33.65, while its WACC came in at 13.88.
Conclusion
In short, the stock of Applied Materials (AMAT, Financial) shows every sign of being fairly valued. The company's financial condition is strong and its profitability is strong. Its growth ranks better than 61.56% of companies in the Semiconductors industry. To learn more about Applied Materials stock, you can check out its 30-Year Financials here.
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