1 artificial intelligence (AI) stock to buy right now before it goes up

Actions of Applied materials (AMAT 1.23%) have posted gains of 28% so far in 2024, despite suffering a sharp pullback since hitting a 52-week high on July 10. And there’s a good chance this semiconductor manufacturing equipment supplier can end the year with more upside.

The company released its fiscal third quarter 2024 results (for the three months ended July 28) on August 15. Its revenue and earnings were better than investors expected, while guidance also beat expectations.

Let’s take a closer look at Applied Materials’ most recent quarterly performance and check out why this chip equipment supplier seems built for more upside.

AI expands Applied Materials’ addressable market

Applied Materials posted record revenue of $6.78 billion in its fiscal third quarter, a 5 percent improvement over the same period last year. The company’s adjusted earnings per share rose 12% year over year to $2.12. Wall Street would have settled for $2.03 a share in earnings on $6.68 billion in revenue.

Even better, its guidance beat consensus estimates. The company expects revenue of $6.93 billion for the fourth quarter, along with earnings of $2.18 per share at the midpoint of the guidance range. The forecast is slightly better than Wall Street expectations of $2.12 per share in earnings on revenue of $6.92 billion.

Shares fell despite posting better-than-expected results and guidance. This is likely because investors were expecting higher growth amid growing demand for AI chips, leading to stronger investment in chipmaking equipment by foundries and chipmakers.

But management said weakness in the auto and industrial markets hurt its performance. The company expects this weakness to fade over the long term due to the rise of electric and autonomous vehicles, as well as the adoption of the Internet of Things in the industrial market.

Investors should note that AI represents perhaps the biggest growth opportunity for applied materials. It relies on a transition to the gate-all-around (GAA) transistor architecture from the field-effect transistor (FinFET) architecture to help drive its growth.

Chipmakers and foundries have adopted the GAA architecture to produce AI chips due to its ability to provide increased performance and lower power consumption simultaneously. GAA plays a central role in the production of chips based on a 3nm process node, and the 3nm chip market could see annual growth of nearly 39% until 2030.

Applied Materials management said at its most recent conference call that the shift from FinFET to GAA transistors is increasing its available market.

The company also benefits from the rapidly growing adoption of high-bandwidth memory (HBM), which is implemented in AI graphics cards from Nvidia and AMD. The company’s revenue from HBM packaging is expected to grow by a multiple of 6 in 2024 to $600 million from last year’s level. This represents another healthy growth opportunity for Applied Materials, as the HBM market is projected to grow 68% annually through 2030.

The factors mentioned above indicate an improvement in the growth rate of applied materials in the coming years. Huge demand for AI chips and an improvement in the automotive and industrial markets are likely why analysts expect the company’s top line to grow at a healthier pace over the next two fiscal years, after a low single-digit jump in the current year at 27 billion dollars.

Estimates of AMAT revenues for the current fiscal year; data by YCharts.

How much can investors expect?

Applied Materials’ accelerating revenue growth is set to filter through to the bottom line as well. The company’s earnings were $8.05 per share in fiscal year 2023, and the estimate for the current year indicates a growth of only 4%, as we can see in the chart below.

AMAT EPS estimates for the current fiscal year; data by YCharts.

However, Applied Materials’ revenue is expected to grow at a double-digit rate over the next two fiscal years, with analysts predicting a 15% compound annual growth rate for the next five years. Based on the company’s fiscal 2024 earnings forecast of $8.42 per share, they could reach $16.94 five years from now.

The stock currently trades at 22 times forward earnings, a discount to Nasdaq-100 forward price-earnings multiple of the index of 27 (using the index as a proxy for technology stocks). Assuming Applied Materials trades at a similar multiple five years from now, its share price could rise to $373. This would be an 80% increase from current levels.

And if the market decides to reward the company with a higher earnings multiple due to an improvement in its growth, it could deliver stronger earnings over the next five years. So investors looking to add an AI stock that’s trading at an attractive valuation right now to their portfolios would do well to take a closer look at Applied Materials.