As the AI boom continues, investors are looking to invest in companies that offer the tools necessary to create AI products. Applied Materials is one such company, with a strong balance sheet and high shareholder returns that are going under the radar at the moment.
The chip maker is a global leader in materials engineering solutions, focused on the semiconductor, flat panel display, and solar photovoltaic industries. The company’s uniqueness comes from its expertise in semiconductor manufacturing equipment and its ability to continuously innovate, facilitating the production of smaller and more powerful chips which are key for modern technology. It was created in 1967 and is headquartered in Santa Clara, California.
The company offers a diverse range of products in three main categories: semiconductor manufacturing equipment, display technology, and solar photovoltaic equipment. The semiconductor manufacturing equipment includes tools for depositing thin materials onto semiconductor wafers, pattering semiconductor devices by removing materials with precision, and introducing ions into semiconductor wafers to modify their electrical properties.
The display technology segment is responsible for the manufacturing of flat panel displays including LCDs and OLEDs while the solar photovoltaic equipment segment specializes in producing solar panels.
Approximately 75% of Applied Material’s total revenue is generated by sales of semiconductor equipment and related services while the display division generates 15% of total sales.
The company’s end markets encompass the semiconductor industry, consumer electronics, and renewal energy, with Intel, Samsung, Micron Technology, Qualcomm, and Taiwan Semiconductor Manufacturing Company being some of its top clients.
AMAT’s strategic advantage stems from being a key player in the creation of AI infrastructure. It is a classic ‘picks and shovels’ company, except that its technological advancement allows it a respectable standalone position as well.
The company has doubled in revenue in the last 5 years, but that’s not what investors are looking at. It is the improvement of EBITDA margin from 26% to 34% that has gained investor attention. The company also enjoys a high return on equity of 43%.
AMAT also has $9.1 billion in cash with a further $5 billion in accounts receivables. Even though the dividend yield stands at a modest 0.9%, shareholder returns are amplified by the stock buyback program. The company has bought back 7.6% of its shares outstanding in the last 3 years.
Our bullish thesis on the stock is driven mainly by demand for AI products, especially data centers and clean energy. With the stock underperforming the S&P 500 so far this year at a modest 11% YTD gain, there is still ample time to get in at the right price levels.
Applied Materials is not on our latest list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 77 hedge fund portfolios held AMAT at the end of the second quarter which was 79 in the previous quarter. While we acknowledge the potential of AMAT as a leading AI investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as AMAT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.
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