On October 2, a caller asked for an opinion about Applied Materials, Inc. (NASDAQ:AMAT) for the next 12 months. In response, Mad Money host Jim Cramer said:
It’s Gary Dickerson. The earnings look like, the PE looks like it’s expensive. That’s because it’s probably going to blow away the earnings. I want you to stay with Applied Materials. By the way, Micron was up big at one point today. In order to be able to try to get out of the shortage situation that we’re in, you need a lot of Applied Materials machines at a place like Micron or anybody else, too.
Cramer also addressed Applied Materials’ long-term appeal on September 9, when a caller’s question about holding the stock prompted an answer that went beyond the original question.
AI Investment Is Translating Into Equipment Sales
Applied Materials, Inc. reported fiscal third-quarter revenue of approximately $9.12 billion, up 25% year-over-year. Adjusted earnings per share increased 41% to $3.50, while operating cash flow reached approximately $3.04 billion. Management identified dynamic random-access memory, leading-edge chip manufacturing and advanced packaging as important sources of expected growth. Those areas connect the company to the manufacturing investment needed for more powerful AI systems. AMAT is also expanding its footprint in another country.
The company also announced on September 29 that KIOXIA would join its EPIC Center as an innovation partner. The collaboration focuses on developing next-generation memory technologies, extending the company’s work with a major flash-memory producer. It is a research partnership, rather than an announced equipment order, but highlights Applied’s involvement in customers’ future manufacturing processes.
The valuation comparison is more favorable than the absolute multiple might suggest. Applied Materials trades at approximately 30.8x forward earnings, below Lam Research’s 36.5x. That does not establish that the shares are cheap, but it shows that Applied is not the more expensive company in this equipment-industry comparison. Nevertheless, both stocks trade at a significantly higher multiple than their sector median of around 24x. In September, we also drew a comparison between Applied Materials and another similar stock.
Strong Demand Does Not Remove Trade and Spending Risks
China remains a significant market for Applied Materials, Inc.. It contributed approximately $2.506 billion, or 28% of fiscal third-quarter revenue, compared with 35% a year earlier. That exposure makes access to Chinese customers an important consideration along with the AI growth story. Export compliance has already carried a financial cost. In February, Applied announced a settlement with the U.S. Commerce Department over allegations concerning shipments to China between November 2020 and July 2022. The company’s latest results included a $252.5 million legal settlement charge in its nine-month operating expenses.
Cramer’s expectation that earnings will exceed forecasts also remains an investment judgment. A forward multiple already uses projected profits, so the stock still needs the expected growth to materialize. Trading below a competitor offers useful context, but does not protect shareholders if equipment demand disappoints.
Fund Ownership Holds Almost Steady
Applied Materials, Inc. appeared in 137 hedge fund portfolios as per Insider Monkey’s second-quarter database, compared with 138 in the first quarter. With 4.2 million shares, Coatue Management was the top hedge fund holder of the stock in Q2. Short interest stood at 1.78% of the public float. The one-fund decline amounts to little change in participation, while the reported short position remained relatively small.
Cramer seems to be willing to pay for the earnings growth he expects from expanding chip production. Applied’s latest results give that view substance, and the KIOXIA partnership adds another connection to future memory technology. The stock still depends on customers turning their manufacturing plans into spending, with trade restrictions remaining a separate complication.
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