Applied Materials Inc

Applied Materials Inc (NASDAQ: AMAT) supplies semiconductor manufacturing equipment and provides material engineering solutions, including mechanical polishing, chemical and physical vapor deposition, critical dimension measurement, wafer- and reticle-inspection, among others.

On 19 August 2021, AMAT has scheduled its earnings call for Q3 FY21.

Investment Rationale – Hold at USD 128.66

• The favourable trends in the semiconductor market shall create a sustainable demand for new chip technologies, underpinning bright prospects for AMAT.
• For Q3 FY21, AMAT has estimated a further sales and EPS growth post record performance in Q2 FY21.
• From a technical standpoint, 51-day EMA (USD 125.56) is sustaining below the current market price and indicating a bullish trend.
• Evidently, the Company has better profitability margins than the industry since gross margin and net margin have remained above 44% and 19% over the past five quarterly results.

Risk Assessments

• The industries that AMAT serves is quite volatile and unpredictable in terms of chips demand, consumer buying patterns, supply chain capabilities, and general economic conditions.
• The global trade issues, fluctuating raw material & shipping costs, unfavourable currency fluctuations and highly concentrated customer base could also affect the growth trajectory.

Recent News

5 May 2021: AMAT announced a new Draco™ hard mask material to accelerate DRAM (Dynamic random-access memory) capacitor scaling and accelerate improvements in chip performance.

Financial Highlights the second quarter ended 2 May 2021 (as on 20 May 2021)

 (Source: Company Website)

• During Q2 FY21, revenue surged 41% year-on-year, while GAAP operating margin stood at 28.3%, reflecting broad-based strength demonstrated by semiconductor businesses.
• In Q2 FY21, GAAP EPS stood at US$1.43, up 74% year-on-year.
• During the second quarter, the Company also returned US$952 million to shareholders post generating US$1.19 billion in cash from operations.
• Due to the deal termination fee paid incurred for US$154 million against the Share Purchase Agreement with Kokusai Electric Corporation and KKR, AMAT’s EPS reduced by US$0.17.

Share Price Chart    

 (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative)

Conclusion

Following the encouraging performance in Q2 FY21, AMAT expects approximately US$5.92 billion of net sales in Q3 FY21, while EPS is forecasted to be in the range of US$1.70 to US$1.82. Moreover, the rapid digital advancement globally in the post pandemic economy shall support major secular trends. In a nutshell, the Company seems well-posited to sustain outperformance and drive profitability and generate higher cash flows. However, considering the overstretched position, we are abstaining from taking a fresh position in the stock. The stock made a 52 week High and Low of USD 146.00 and USD 53.32, respectively.

Based on the strong fundamentals, solid guidance, and valuation conducted above, we have given a “Hold” stance on Applied Materials Inc at the closing price of USD 128.66 (as on 21 May 2021), when inherent macroeconomic uncertainty fades away and stock price is not overstretched.

Advanced Micro Devices Inc

Advanced Micro Devices Inc (NASDAQ: AMD) designs microprocessors for consumer electronics and computer industries. It also supplies chips used in prominent game consoles.

Investment Rationale – BUY at USD 77.17

• AMD has accelerated business growth and operating with the best product portfolio in history, which shall be supported by strong market demand.
• The global semiconductor chip shortage shall bring healthy margins on AMD’s sales, while Xilinx’s acquisition should bolster AMD’s efforts.
• With a new share repurchase program, AMD expects to return value to shareholders, reduce share count over time and offset dilution from stock issuances.
• Over the past four years (FY16 to FY20), revenue and gross have grown significantly at a CAGR of nearly 22.95% and 44.47%, respectively.
• From a technical standpoint, 14-day RSI (47.39) is favourable to support the upside potential.

Risk Assessments

• Macroeconomic uncertainty and loss of significant customers can materially impact the operating results.
• The Company operates in a highly competitive market, while semiconductor is a quite cyclical business.
• The stock price has remained quite volatile over the past six months, considering the economic risk, tech stock sell-off and operational risk.

Recent News

19 May 2021: AMD announced the approval of a new share repurchase program for up to US$4 billion of outstanding common stock.

Financial Highlights for the quarter ended 27 March 2021 (as on 27 April 2021)

 (Source: Company Website)

• During Q1 FY21, revenue jumped 93% year-on-year, driven by solid growth across Embedded & Semi-custom, Computing & Graphics and Enterprise segments.
• The gross margin in Q1 FY21 stood at 46%, at par year-on-year. Adjacently, the operating income rose significantly with higher revenues.
• There was a significant increase in net income and earnings per share (EPS) in Q1 FY21, reflecting a sound financial performance.
• AMD ended Q1 FY21 with US$3.12 billion in cash, cash equivalents and short-term investments, supported by the robust market demand.

One Year Share Price Chart    

 (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

Following the growth in data center revenue and across all businesses, AMD has increased its FY21 guidance as the Company expects expansion of customer relationships and increasing adoption of computing products. For FY21, nearly 50% revenue growth is expected over FY20, while Q2 FY21 revenue is likely to surge around 86% year-on-year with strong growth in data center and gaming. Moreover, the periodic imbalance in the semiconductor market is likely to bring long-term commitments from customers. The stock made a 52 week High and Low of USD 99.23 and USD 48.42, respectively.

Based on the decent fundamentals and valuation methodology, we have given a “BUY” stance on Advanced Micro Devices Inc at the closing price of USD 77.17 (as on 21 May 2021), with a lower double-digit upside potential based 43.17x Price/Earnings (approx.) on FY21E Earnings Per Share (approx.). 

*All forecasted figures and Industry Information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.