Applied Materials' Knee-Jerk Sell-Off Is Your Signal to Buy

Key Points

• Applied Materials' solid Q3 was overshadowed by doubts that left the market in correction, opening an attractive entry point for income investors.
• The outlook for semiconductor equipment is robust and driven by the rapid expansion of fabrication capacity globally.
• Analysts are bullish on this stock for the long term but may weigh on the price action in Q3.

Applied Materials NASDAQ: AMAT gave its market a reason to sell with its Q3 results. However, the 15% pre-market decline is a knee-jerk reaction to news that opens up a solid buying opportunity. The primary cause for the sell-off is weak guidance and uncertainty.

The critical takeaway is that this company’s business tends to be lumpy, ie, results can be iffy on a quarter-to-quarter basis due to timing and market dynamics, and end-market normalization is at hand in China. 

China’s semiconductor market front-loaded its semiconductor equipment orders because of the tariff threat, but will soon return to steady growth. Until then, the remainder of the business is in healthy condition, the balance sheet is rock-solid, and the robust capital return is reliable.

The capital return is significant to investors and the long-term share price outlook because it includes dividends, share repurchases, and annual distribution growth. 

Capital Return and Balance Sheet Make AMAT a Buy

The outlook for distribution growth is robust with the company’s very low payout ratio and share repurchases. The repurchases are aggressive in F2025, reducing the count by 3.7% on average in Q3 and 2.8% year-to-date.

The distribution CAGR may slow from its current 15% in the upcoming years, but will likely remain strong at a double-digit level for the foreseeable future. 

The pace of share repurchases in Q3 is also robust. The buyback was nearly double the prior year; the only risk is that it may slow in the upcoming quarters. However, share count reduction is significant at the pace of the prior year and is a benchmark for investors.

The critical takeaway is that, despite the tepid guidance, the long-term outlook and balance sheet strength suggest the capital returns will continue to be robust long into the future. Oh, and the dividend yields more than 1.0% annually with the shares trading near long-term lows. 

The balance sheet reflects the company’s aggressive share repurchase, with cash and current assets down and total assets flat compared to the prior year. However, the softness is offset by reduced current and total liability, flattish long-term debt, and a 2.6% increase in equity.

The net result is that leverage remains remarkably low, with long-term debt running just over one times the cash and total liabilities are less than equity, leaving the company in a fortress-like position.

Analysts' sentiment may weigh on the market in Q3, but a significant shift in the ratings is not anticipated. The consensus of 25 analysts tracked by MarketBeat is that this stock is a Moderate Buy, with a bullish bias, as 70% of them rate it at Buy or higher, and the consensus price target is firm near $205.

When reached, the $205 target is a fresh long-term high and technical trigger. A move to new highs would confirm a reversal pattern in the stock and set the market up for a run to $250. The risk is that analysts will lower their price targets in Q3, capping gains until a catalyst emerges. 

Applied Materials Strong Q3 Overshadowed by Doubt

Applied Materials had a strong Q3 with revenue of $7.3 billion, growing by 7.7% compared to the prior year. The gain was driven by a 10% increase in Semiconductor Systems, which was in turn led by the flash memory market. Services revenue was solid but produced no growth, while the Display market expanded by 5%.

Margin is another area of strength, developing the gross and operating levels to drive accelerating bottom-line results. The $2.48 in adjusted earnings increased by 17%, outpacing the consensus estimate by 12 cents, but the strength is not expected to carry into Q4. 

The problem for the market is the guidance. The company forecasted weaker-than-expected results for revenue and earnings but cited significant uncertainties and provided a wide margin of error.

The best-case scenario is that results will align or fall slightly short of the early-August consensus; the worst-case scenario is that Q4 results will miss by a high, double-digit figure, which is unlikely given the semiconductor industry dynamics.

The long-term outlook is robust, and guidance will likely be favorable. The latest reports reveal that more than 70 semiconductor fabrication facilities are being built globally, and 70% of them are brand new.