Applied Materials Has Become a Favorite Way to Play the Chip Shortage. Analysts Are Raising Their Price Targets.
Shares of Applied Materials have surged 18% so far this year.
David Paul Morris/Bloomberg
A surge in demand for chips used in products ranging from appliances to automobiles has created a favorable environment for semiconductor businesses that is likely to continue this year. One of the ways investors have sought to profit from the shortage is by owning stocks of companies that make the equipment used to manufacture chips.
Applied Materials (ticker: AMAT) is one such name, and two analysts increased their price targets on the stock ahead of the company’s planned investor event on Tuesday. Applied Materials stock gained 1.1% to $143.05 on Monday, as the PHLX Semiconductor index, or Sox, rose 2%.
Credit Suisse analyst John Pitzer raised his target price to $175 from $145 on Sunday and reiterated the equivalent of a Buy rating on shares. Pitzer wrote that some investors may regard Tuesday’s event as a “sell-the-news” opportunity, but doing so would be a mistake, he noted.
Pitzer argued that investors can do well with Applied Materials shares because it has become very costly to expand chip manufacturing capabilities. The U.S. government has also signaled the importance of retaining and growing domestic manufacturing capacity, which could lead to demand for Applied’s products. Applied Materials stock is also cheap, Pitzer said.
“While cyclicality is a risk, the secular backdrop supports higher highs and higher lows meaning [earnings of greater than $10 a share in the long term] is NOT a peak but a new base off of which to drive further growth,” Pitzer wrote.
Stifel analyst Patrick Ho also raised his target price on Sunday, bumping it to $160 from $140. Ho also has a Buy rating on the stock. Applied’s higher valuation is warranted, he said, because Tuesday’s investor day will be positive for the stock.
He expects executives to outline a new financial model on Tuesday that highlights what the company is capable of in terms of earnings and cash flow generation. “We believe that its earnings leverage has been underestimated (including by us) and management’s update will showcase the continued improvements made on this front,” Ho wrote.
According to Ho’s calculations, the company should be able to produce earnings of about $8 a share, assuming annual revenue reaches $25 billion. At the moment, analysts expect earnings of $6 a share on sales of $21.7 billion for this year. Applied said that it expects to report its fiscal second-quarter results on May 20.
Of the analysts that cover Applied Materials, 25 rate it a Buy and four have a Hold rating. A single analyst advises investors to sell shares. The average target price is $143.73, which implies the stock will fall less than 1% in the next year.
Applied Materials is set to hold its investor day Tuesday, kicking off at 11 a.m. Eastern time.
Applied Materials shares have surged 242% in the past year as the Sox has advanced 128%. The S&P 500 index gained 64% in the same period.
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