The market has fallen in love with it Nvidia for a few years now. So much so that this month it once again became the largest company in the world by market capitalization, with a net worth of more than $3.5 trillion. The rise of artificial intelligence (AI) has been a huge boon to the company, and with the shares up more than tenfold in just a few years, it would be understandable that investors who hadn’t gotten in before would think they could get the missed the boat. .
So what should an investor do now if they want to open a new position that will allow them to ride the AI wave? One promising AI stock that has taken a dive this year is AI stocks Applied materials(NASDAQ: AMAT). The semiconductor equipment maker has been hit by a slowdown in sales to China, but smart investors will know this is only a temporary headwind for a company with a wide moat. Here’s why now is the time to buy the dip in Applied Materials.
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Many investors now know that Nvidia – like countless other companies – designs computer chips that are widely used in modern life. From data centers to smartphones to virtual reality glasses: the world is powered by semiconductors.
Building advanced semiconductors requires a lot of innovation, and making them smaller and more powerful requires complicated and advanced machines. This is where Applied Materials steps in. Without going into the finer details, the company produces the equipment and software that semiconductor manufacturers use to package, etch and form their chips. The technology allows manufacturers to produce chips with higher performance, lower electricity consumption and smaller surface area – qualities valued in the semiconductor industry.
Given how important these factors are when building chips, Applied Materials can charge a lot for its machines and the service contracts that come with them. Over the past four reported quarters, the company has generated $27 billion in revenue from customers worldwide.
Applied Materials’ long-term financial performance has been phenomenal. Free cash flow for the last four quarters was $7.5 billion, and it has been positive for every twelve-month period in the 21st century. Although Applied Materials operates in a cyclical industry, the company has been able to consistently generate positive cash flow due to the importance of its machines to manufacturers.
With all the money coming into the company, the company has been able to buy back a lot of shares. Since 2003, the company has reduced the number of shares outstanding by more than 50%, allowing it to grow earnings per share (EPS) and free cash flow per share. For investors, these are two of the most important metrics to track because they create shareholder value in the long term. Free cash flow per share has increased by almost 800% over the past ten years.
ACHR Operating Income (TTM) data by YCharts.
Investors have been selling shares of Applied Materials due to plummeting Chinese sales in the last fiscal quarter. During the fourth fiscal quarter ended Oct. 27, sales in China fell to $2.1 billion from $3 billion in the same period a year ago. Semiconductor manufacturers in China are ordering many machines due to threatened or existing export restrictions from the United States. Investors see these trading restrictions as a major headwind for a segment that accounted for 30% of Applied Materials’ revenue last quarter.
While this is a problem in the short term, the world will need more computer chips regardless of where they are manufactured. If the resources to make them are less available to companies operating in China, their production will take place in other countries. But Applied Materials will still find demand for its highly sought-after machines.
After the recent sell-off, Applied Materials is now trading more than 33% below its all-time high. The shares trade at a price-to-earnings (P/E) ratio of 20 and a forward P/E of 17.7, based on analyst estimates – well below S&P500 The average price-to-earnings ratio of the index is 30. For a company that should grow with the booming semiconductor market, these profit ratios seem far too cheap. So buy a number of Applied Materials shares during this dip and hold them for the long term.
Before purchasing shares in Applied Materials, consider the following:
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Applied Materials and Nvidia. The Motley Fool has a disclosure policy.
Did you miss an investment in Nvidia? Here are 1 artificial intelligence (AI) chip stocks to buy on the dip, originally published by The Motley Fool
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