Is Applied Materials Stock a Buy Now?

Applied Materials (NASDAQ: AMAT), one of the world's largest suppliers of semiconductor manufacturing equipment, has been a great long-term investment. Over the past 10 years, its stock rallied more than 600% and generated a total return of over 700%. The S&P 500 generated a total return of 260% during the same decade.

Applied Materials is a linchpin of the expanding semiconductor sector. Its growth is cyclical, but its revenue still rose at a compound annual growth rate (CAGR) of 12% from fiscal 2014 to fiscal 2024 (which ended this October) as its earnings per share (EPS) grew at a CAGR of 26%. Should investors still buy the stock today and expect it to stay ahead of the market?

Image source: Getty Images.

How fast is Applied Materials growing?

In fiscal 2024, Applied Materials generated 73% of its revenue from its semiconductor systems business, which serves the foundry, logic, and memory markets. Another 23% came from its related services, while the remaining sliver came from its display and adjacent markets group. Here's how those three core businesses fared over the past five years.

Data source: Applied Materials.

In fiscal 2020 and fiscal 2021, the pandemic disrupted the semiconductor market's supply chains and caused chip shortages. The soaring demand for PCs for remote work and online learning exacerbated that pressure. As a result, its growth accelerated in both years as chipmakers expanded their capacity to resolve those shortages.

But over the following three years, its growth decelerated as it lapped that buying frenzy. The PC, smartphone, industrial, and automotive markets cooled off in a more challenging macroenvironment, and the tightening export curbs throttled its equipment sales in China, which still accounted for 37% of its total revenue in fiscal 2024.

Investors should pay close attention to its exposure to China. The U.S. Department of Justice (DOJ) has been scrutinizing its equipment sales to China's top chip foundry, SMIC, over the past year. Its dependence on China also reportedly caused its application for CHIPS Act funding (for a new $4 billion R&D center) to be denied this July.

Will a new growth cycle start in fiscal 2025?

Applied Materials slowdown isn't surprising, since the market's two other bellwethers -- Taiwan Semiconductor Manufacturing (NYSE: TSM) and ASML (NASDAQ: ASML) -- faced similar headwinds.

However, it expects its growth to accelerate again over the next few years as the market's demand for more powerful artificial intelligence (AI) chips, new energy-efficient chips, and denser memory chips heats up again. It also plans to increase the stickiness of its ecosystem with new integrated solutions that merge multiple steps (such as material deposition, etching, and material modification) into a single system. As for China, it expects to gradually reduce its exposure to that volatile market.

Assuming those tailwinds kick in, analysts expect its revenue and adjusted EPS to grow 9% and 10%, respectively, in fiscal 2025. They expect its revenue and adjusted EPS to climb another 8% and 13%, respectively, in fiscal 2026.

Based on those expectations, Applied Materials' stock still looks cheap at 17 times forward earnings. By comparison, ASML trades at 27 times forward earnings, while TSMC -- one of Applied Materials' top customers -- has a forward multiple of 21.

Applied Materials has also consistently returned a lot of its cash to its investors via buybacks and dividends through boom and bust cycles. It bought back nearly a third of its shares over the past decade, and it pays a forward dividend yield of 0.9%.

Therefore, if you expect the semiconductor market to heat up again and stay hot for the next few years, it might be a great time to add Applied Materials to your portfolio. However, investors should still keep a close eye on its issues in China, which could offset the cyclical recovery of its other businesses.

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Leo Sun has positions in ASML. The Motley Fool has positions in and recommends ASML, Applied Materials, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.