Applied Materials Stock Has Tailwinds That Should Let It Outperform the Market

Stocks to buy

The demand for semiconductor chips is tremendous and growing, while the world’s largest chipmakers are rushing to dramatically increase their production. That makes Applied Materials (NASDAQ:AMAT) stock a great play here.

a machine manufactures semiconductor chips in a factory setting

Source: Shutterstock

The company, which makes equipment used in semiconductor production, also has a lot of fans on Wall Street.

Multiple analysts are very bullish on the shares, while the stock’s valuation is reasonable. Taken together, these points make Applied Materials very attractive for some tech investors looking for exposure to the chip space.

With semiconductor sales forecasted to jump 9% in 2022, the demand for chips is obviously expected to surge. That’s hardly a surprise, given the increase in the number of connected devices owned by those in developed countries.

Meanwhile, a slowdown in the demand for PCs has been seen as one of the main threats to AMAT stock and other names in the chip sector.

Hard-disk drive maker Western Digital (NASDAQ:WDC) recently reported that  PC demand has remained strong, and that shipment forecasts are robust and ahead of pre-pandemic levels.

Meanwhile, a number of the world’s largest chipmakers are increasing their capacity to meet the surging demand for semiconductors.

In April 2021, the world’s largest contract chipmaker, Taiwan Semiconductor (NYSE:TSM), announced it would spend $100 billion by 2024 to support the manufacturing and R&D of advanced semiconductor technologies.

For its part, Intel (NASDAQ:INTC) plans to spend $20 billion on two new chip plants in Arizona.

Research firm Bain predicts the capital spending among chipmakers over 2021-2025 will jump almost 100% above 2016-2020 production levels.

It may take another year or two for Applied Materials’ results to benefit a great deal from these production increases. Still, for patient, long-term investors, that’s not a problem. Moreover, the market could start pricing the positive, long-term production outlook into AMAT stock just six months from now.

Multiple Analysts Are Upbeat on AMAT Stock

In December, Cowen analyst Krish Sankar named Applied Materials a top pick for 2022. Sankar expects the company to benefit from stepped-up spending on chipmaking equipment.

“We believe product momentum should help AMAT ride the waves of memory and foundry/logic (chip) spending,” Sankarsaid. The analyst placed an “outperform” rating and a $190 price target on the shares.

Also upbeat was Jefferies analyst Mark Lipacis, calling Applied Materials one of the top names in the chip-equipment sector. Lipacis predicted that the company’s free cash flow would jump 34% this year. The analyst expects its free cash flow to remain strong for many years to come.

Lipacis started coverage of the shares with a “buy” rating and a $197 price target. AMAT trades around $132 today.

Citi analyst Atif Malik named AMAT stock as his top pick in the semiconductor sector. Malik expects the company to benefit from increased spending on chipmaking equipment, as well as higher  government spending on chips.

The Bottom Line

The company is well-positioned to benefit from the strong demand and rapidly increasing supply dynamics in the semiconductor sector. Analysts’ bullishness on the company also reflects well on it.

Applied Materials also has a reasonable valuation. The price-to-earnings ratio is only 22, according to Marketwatch.

I see the shares as a good play for long-term investors with intermediate risk tolerance who are looking for exposure to the semiconductor space.

Those with low risk tolerance should buy the iShares Semiconductor ETF (NASDAQGM:SOXX).

On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Larry Ramer has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015.  Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer. 

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