We recently published a list of 10 Tech Stocks with High Upside Potential. In this article, we are going to take a look at where Applied Materials, Inc. (NASDAQ:AMAT) stands against other tech stocks with high upside potential.

As per Forrester Research, Inc., despite persistent inflation, the US real GDP is expected to increase 2.7% in 2025 and the US tech spending is projected to see growth of 6.1% to touch a staggering $2.7 trillion. The software spending in the US is expected to increase by 10.7% in 2025. With the escalation in cybersecurity risks, companies continue to leverage cloud and GenAI technologies to fuel future growth and innovation.

AI to Drive Growth in Tech Sector in 2025

The largest US stocks, also referred to as the Magnificent 7, have seen a strong run over the previous 2 years, mainly due to the buildout of AI infrastructure, says Goldman Sachs. Sung Cho, co-head of US Fundamental Equity in Goldman Sachs Asset Management. Cho believes this buildout can significantly benefit data and security companies, and software companies successfully integrating AI in their existing product set. As the Fed continues to cut rates, the smaller tech companies – which saw contraction in their multiples because of higher rates – might see a favourable macro backdrop.

READ ALSO: 7 Best Stocks to Buy For Long-Term and 8 Cheap Jim Cramer Stocks to Invest In.

Robust AI Investments are On the Horizon

UBS has highlighted how AI has and will continue to drive the growth of the broader technology sector. As per the firm, since the rollout of ChatGPT in November 2022, the total market capitalization of companies listed on the US technology exchange NASDAQ increased to ~US$13.5 trillion. Notably, around two-thirds of this value increase has been directly caused by the AI sector. Moving forward, the decisive factor is expected to be the extent to which significant investments in AI-based infrastructure can be translated into profitable business models.

While highlighting the consensus estimates, UBS stated that the 4 major US technology corporations are projected to invest ~US$280 billion in AI this year. Given the increased usage of this key technology across industries, value creation processes are expected to be optimized. This can lead to significant productivity gains. One such area is the market for robotics and automation, which is expected to reach a sales volume of ~US$350 billion in 2025, says UBS analysts. Notably, humanoid robotics will be the key area of particular interest because of the innovations.

Our Methodology

To list the 10 Tech Stocks with High Upside Potential, we used a screener and shortlisted the stocks catering to the broader technology sector. Next, we filtered out the stocks having an average upside potential of at least ~30%, as of February 28. Finally, the stocks were arranged in ascending order of their average upside potential. We also mentioned the hedge fund sentiments around each stock, as of Q4 2024.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).

Applied Materials, Inc. (NASDAQ:AMAT)

Average Upside Potential: ~29.6%

Number of Hedge Fund Holders: 80

Applied Materials, Inc. (NASDAQ:AMAT) is engaged in the provision of manufacturing equipment, services, and software to the semiconductor, display, and related industries. Morningstar expects 8% compound annual sales growth for the company through fiscal 2029. However, it expects robust growth for Applied Materials, Inc. (NASDAQ:AMAT) in fiscal 2025 and 2026, driven mainly because of strong capacity expansions at chipmakers to supply AI demand.

Furthermore, the firm expects mid-cycle growth in the mid-to-high single digits. As per Morningstar, this growth is expected to be aided by more advanced chip designs at chipmakers relying on Applied Materials, Inc. (NASDAQ:AMAT)’s equipment to manufacture gate-all-around transistors, chiplet designs, and high-bandwidth memory. The company is expected to earn returns on invested capital well above its cost of capital for the upcoming 20 years. Applied Materials, Inc. (NASDAQ:AMAT) will benefit from drivers of chip complexity, such as gate-all-around transistors and advanced packaging.

As per Morningstar, Applied Materials, Inc. (NASDAQ:AMAT)’s proficiency in wafer fabrication equipment stems from top-notch design expertise, while its embedded services business and long-term customer roadmaps remain sticky. Vltava Fund, an investment management company, released its Q4 2024 investor letter. Here is what the fund said:

“In the quarter just ended, we added to the portfolio two new companies from the technology sector: Applied Materials, Inc. (NASDAQ:AMAT) and Lam Research. Both are in the same industry as is another of our investments that we have held for some time, KLA Corporation. This industry is termed semiconductor devices and materials. One chapter in Hidden Investment Treasures is devoted to investing in technology companies and, among other things, the controversy over what really constitutes a technology company. As investors, we try to view technology companies not according to the industry into which they are formally classified but by whether the technologies and technological processes used in the production of their products and services are an essential element in value creation or if they are a source of long-term, sustainable competitive advantage. Among the companies that are formally categorized as technology-based and fall into either the Information Technology or the Communications Services sector, we find some that can be said to be just that but also others for which this classification is at least debatable. Similarly, among companies that do not formally belong to these two sectors, we find many that clearly are built to a large extent on technology and base their market positions and competitiveness on it. In the cases of Applied Materials and Lam Research, there can be no doubt that these are technology companies not only as a formality but also in fact.

Applied Materials provides manufacturing equipment, services, and software for the semiconductor, display, and related industries. Its principal business activities are semiconductor systems and Applied Global Services. Its largest customers are Samsung and Taiwan Semiconductors, but its overall clientele is more diversified than is that of Lam Research. At first glance, it would appear that Applied Materials has a somewhat less tangible and definable competitive advantage compared to KLA Corporation and Lam Research, but the numbers do not support such a view. Net margins likewise in the neighborhood of 27% and ROCE around 30% are outstanding. Basically, it can be said that all three companies we own have very similar underlying profitability metrics. Even their valuations, growth, and potential are similar. All have strong free cash flow and strong balance sheets, and they are regularly buying back their own shares over the long term and in large volumes…” (Click here to read the full text)

Overall, AMAT ranks 9th on our list of tech stocks with high upside potential. While we acknowledge the potential of AMAT as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for a deeply undervalued AI stock that is more promising than AMAT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

READ NEXT: 20 Best AI Stocks To Buy Now and Complete List of 59 AI Companies Under $2 Billion in Market Cap

Disclosure: None. This article is originally published at Insider Monkey.