Applied Materials, Inc. (AMAT) in Santa Clara, Calif., provides manufacturing equipment, services, and software to the semiconductor, display, and related industries. It operates through three segments: Semiconductor Systems; Applied Global Services; and Display and Adjacent Markets. In comparison, KLA Corporation (KLAC) in Milpitas, Calif., designs, manufactures, and markets process control and yield management solutions for the semiconductor and related nanoelectronics industries worldwide.
Semiconductor companies have been thriving as chip demand has increased tremendously with the world trying to stay afloat remotely and the government taking measures to increase the use of EVs. While the need is rising, the shortage of semiconductors, which has been exacerbated by rising COVID-19 cases in China and the Russia-Ukraine war is driving soaring prices. The industry is also witnessing increasing domestic and international investments to ramp up production. And with the increasing use of IoT, 5G, and AI, the demand for semiconductors should keep growing. Indeed, according to BlueWeave consulting, the global semiconductor market is estimated to grow at a 5.2% CAGR between 2022 -2028. Therefore, both AMAT and KLAC should benefit.
KLAC shares have gained 1.9% in price over the past nine months, while AMAT generated negative returns. But which of these two stocks is a better buy now? Let’s find out.
Click here to checkout our Semiconductor Industry Report for 2022
Latest Developments
On March 11, 2022, AMAT announced that its board of directors had approved a new $6 billion share repurchase program, supplementing its previous program, which had $3.2 billion remaining at the end of the first quarter of its fiscal year 2022. In addition, the board approved an 8.3% increase in the company’s quarterly cash dividend to $0.26 from $0.24 per share, marking the fifth consecutive annual dividend increase.
On April 7, 2022, KLAC announced the launch of Frontline Cloud Services, a software solution that accelerates design-for-manufacturability analysis and time-to-market for complex printed circuit boards. This enables up to 90% faster DFM analysis speeds to meet productivity demands.
Recent Financial Results
AMAT’s revenues increased 21% year-over-year to $6.27 billion for its fiscal first quarter, ended Jan. 30, 2021. The company’s non-GAAP net income came in at $1.70 billion, representing a 32% year-over-year increase. Also, its non-GAAP EPS came in at $1.89, up 36% year-over-year.
KLAC’s revenues increased 20% year-over-year to $2.35 billion for its fiscal second quarter, ended Dec. 31, 2021. The company’s non-GAAP net income came in at $851.04 million, representing a 68.8% year-over-year increase. Also, its non-GAAP EPS came in at $5.59, up 72.5% year-over-year.
Past and Expected Financial Performance
AMAT’s revenue and levered FCF grew at CAGRs of 14.2% and 62.4%, respectively, over the past three years. Analysts expect AMAT’s revenue to increase 15.1% in the current year and 10.1% next year. The company’s EPS is expected to grow 18.4% in the current year and 14.8% next year. Furthermore, its EPS is expected to grow at a 15.7% rate per annum over the next five years.
In comparison, KLAC’s revenue and levered FCF have grown at CAGRs of 23.8% and 27.8%, respectively, over the past three years. The company’s revenue is expected to increase 30.2% in the current year and 13.2% next year. Its EPS is expected to grow 41.2% in the current year and 15% next year. Also, KLAC’s EPS is expected to grow at a 19.7% rate per annum over the next five years.
Profitability
AMAT’s trailing-12-month revenue is 2.96 times KLAC’s. However, KLAC is more profitable, with gross profit and net income margins of 60.77% and 36.57%, respectively, compared to AMAT’s 47.67% and 27.10%.
Furthermore, KLAC’s ROE and ROTC of 85.36% and 28.14%, respectively, are higher than AMAT’s 56.07% and 27.87%.
Valuation
In terms of forward non-GAAP P/E, KLAC is currently trading at 15.37x, which is 14.8% higher than AMAT’s 13.39x. Furthermore, KLAC’s 5.35x forward EV/S ratio is 47.4% higher than AMAT’s 3.63x.
So, AMAT is relatively affordable here.
POWR Ratings
AMAT has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. In contrast, KLAC has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
Among the 96 stocks in the B-rated Semiconductor & Wireless Chip industry, AMAT is ranked #27. In comparison, KLAC is ranked #42.
Beyond what I have stated above, we have also rated the stocks for Quality, Value, Growth, Momentum, Stability, and Sentiment. Click here to view all the AMAT ratings. Also, get all the KLAC ratings here.
The Winner
The semiconductor space is booming with rising demand for advanced technologies. And while both AMAT and KLAC are expected to gain, we think it is better to bet on AMAT because of its lower valuation.
Our research shows that the odds of success increase when one invests in stocks with an overall POWR Rating of Strong Buy or Buy. View all the other top-rated stocks in the Semiconductor & Wireless Chip industry here.
Click here to checkout our Semiconductor Industry Report for 2022
AMAT shares were trading at $114.82 per share on Thursday afternoon, up $6.01 (+5.52%). Year-to-date, AMAT has declined -26.90%, versus a -9.36% rise in the benchmark S&P 500 index during the same period.
About the Author: Nimesh Jaiswal
Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.
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