AMAT data by YCharts
It wouldn't be surprising to see these tech stocks repeat their impressive feats in the next bull market, especially considering that the demand for their products and solutions is going to remain robust for a long time to come. That's why it would make sense for investors to accumulate shares of AMD and Applied Materials while they're down and are available for relatively cheaper valuations.
AMD, for instance, is trading at 45 times trailing earnings and 28 times forward earnings. When compared to the five-year average trailing multiple of 109 and forward earnings multiple of 57, the stock is quite cheap.
Applied Materials, on the other hand, is trading at 18 times trailing earnings and 15 times forward earnings. These multiples are in line with the company's five-year average earnings multiples, but it is worth noting that Applied Materials had a trailing price-to-earnings ratio of 24 in 2021. So, just like AMD, Applied Materials stock is also on the affordable side right now.
However, these companies may not be available at such attractive valuations in the future given the pace at which they're growing.
There are a few concrete reasons why AMD could exceed its expectations once again this year. For example, the company is on track to benefit from an increase in sales of gaming consoles. Microsoft and Sony use AMD's semi-custom chips in their consoles. Sony sold 17.3 million units of the PlayStation 5 (PS5) by the end of 2021, while Microsoft's latest Xbox consoles reportedly moved 12 million units by the end of last year.
Sony's PS5 is expected to hit an installed base of 67 million units by 2024, while Microsoft's current-generation Xbox consoles could have an installed base of 44 million units by then. Throw in the fact that AMD is now powering another handheld console, and its semi-custom business seems built for solid growth in the long run.
The server processor business will be another key growth driver. That's because AMD has been consistently taking share away from rival Intel in this market. AMD reportedly had a 10.7% share of the server processor market at the end of 2021. Analysts expect its share to go as high as 25% in the server processor space.
Applied Materials, meanwhile, is benefiting from the semiconductor boom as it supplies manufacturing equipment and services that help foundries make chips. The company finished fiscal 2021 with record revenue of $23 billion, up 34% from the prior year. Applied Materials maintained its growth momentum in the first quarter of fiscal 2022, with revenue increasing 21% year-over-year to $6.27 billion and adjusted earnings jumping 36% to $1.89 per share.
Applied Materials clocked such impressive growth despite supply chain constraints, and exited the quarter with a record order backlog of $8 billion. The company expects spending on wafer fabrication equipment to increase 15% in 2022 to $100 billion. More importantly, management anticipates that Applied Materials will grow at a faster pace than the broader market, and carry a significant backlog into 2023 as well.
With annual spending on wafer fabrication equipment expected to hit as much as $120 billion by 2025 according to third-party estimates, Applied Materials is operating in a market that's built for long-term growth. This explains why analysts are expecting Applied Materials to clock 16.5% annual earnings growth for the next five years -- though the company could do better by sustaining its current pace on account of the sizable end-market opportunity it is sitting on.
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