Why Wells Fargo Named This Semiconductor Giant a Top Pick

Applied Materials Inc. (NASDAQ: AMAT) recently held its analyst day, and a few analysts piled onto the stock as the company sees positive trends within the semiconductor industry. Wells Fargo issued a bullish call naming Applied Materials as a top pick.

Wells Fargo reiterated an Overweight rating and raised its price target to $160 from $145, implying upside of about 15% from the most recent closing price of $139.54.

While Wells Fargo views the company’s target operating model as relatively in line with its previewed expectation, the investment house would positively view Applied Materials’ targeting these levels for fiscal 2024, versus expectations of fiscal 2025. Much of this is based on the growth of wafer fab equipment over the coming years.

With the company’s industry-related presentations in mind supporting a continued positive tailwind from semi manufacturing complexity, Wells Fargo believes investors will continue to gauge upside to the company’s target model, assuming capital intensity is relatively flat compared with current levels.

The presentation from CEO Gary Dickerson highlighted the continued positive semiconductor industry trends, estimating semiconductor revenue for the industry could reach $1 trillion by 2030. These were a few of the key takeaways:

  1. AI era = secular growth and accelerated innovation;
  2. Applied = PPACt enablement company; AMAT estimates that its PPACt revenue can grow over 80% through F2024 vs. $6.5B in F2020.
  3. Shifting more business to subscription-style revenue and integrated solutions. The company has highlighted its efforts to transition AGS customers from transactional contracts to long-term / sticky recurring revenue models; targeting ~70% subscription contribution by F2024 (vs. ~60% in F2020).
  4. Optimizing portfolio for growth and FCF; AMAT is targeting $6.5B FCF in F2024 and highlighted the optimization of its Display business to drive improved cash flow.
  5. Operating model = grow EPS 1.7x to 2x revenue growth.

Excluding Wednesday’s move, Applied Materials stock had outperformed the broad markets with a gain of about 61% year to date. In the past 52 weeks, the share price was up 230%.

Applied Materials stock traded at $139.12 on Wednesday, in a 52-week range of $46.22 to $146.00. The consensus price target is $144.35.

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