Applied Materials Stock Dips: Should Investors Seize the Opportunity?

What Caused the Stock Drop in October?

The decline in Applied Materials’ stock price can be attributed to multiple intertwined factors impacting the semiconductor industry as a whole:

1. Weak Booking Reports from ASML

ASML, a leading semiconductor equipment manufacturer, reported disappointing quarterly results, revealing that new order bookings totaled only €2.6 billion. This news sent shockwaves through the semiconductor equipment market, causing investors to reevaluate the demand for equipment across the sector. Given ASML’s significance in the industry, its sluggish performance has raised concerns that Applied Materials may face similar challenges.

2. U.S. Scrutiny Over China Sales

In addition to ASML’s disappointing results, Applied Materials is under investigation by the U.S. government for potential illegal sales of equipment to China. This scrutiny comes amid heightened tensions between the U.S. and China regarding semiconductor technology. The concern is significant since approximately 32% of Applied Materials’ revenue in the third quarter of fiscal 2024 came from sales to China. Regulatory challenges could severely impact the company’s revenue and market position, adding another layer of risk for investors.

Is It Time to Buy Applied Materials Stock?

With a market capitalization of $151 billion following the recent dip, Applied Materials is now trading at a price-to-earnings (P/E) ratio of 20, with a forward P/E ratio of 18. Both metrics are below the average for the S&P 500, suggesting that the stock may be undervalued relative to its historical performance.

Applied Materials has been a strong performer over the past decade, boasting a staggering 839% total return, driven in large part by demand for advanced semiconductor manufacturing tools essential for industries such as artificial intelligence (AI), cloud computing, and smartphones. The ongoing increase in AI investments could potentially fuel further growth for Applied Materials in the future.

Potential Risks Investors Should Consider

While the recent price drop may present a buying opportunity for some investors, several risks must be carefully weighed:

1. Heavy Dependence on the Chinese Market

Applied Materials’ significant investment in the Chinese market poses a considerable risk. If the U.S. government imposes restrictions or if relations deteriorate, the company could face substantial revenue losses. The impact of such changes may take years to recover from, potentially hindering growth in other markets.

2. Uncertain Regulatory Environment

The ongoing investigation into potential illegal sales to China could lead to fines or other regulatory consequences. This uncertainty adds a layer of risk for investors, who must consider the potential long-term implications on Applied Materials’ operations and financial health.