Applied Materials (AMAT) is near a key support level and holding near highs ahead of its Aug. 19 earnings report. But is AMAT stock a buy now?
Semiconductor stocks were under pressure Tuesday after Taiwanese market researcher TrendForce said contract prices of memory chips built into personal computers could decline by as much as 5% quarter over quarter in Q4.
For the current quarter, the Zacks consensus estimate is for adjusted profit of $1.76 a share, up 66% from a year earlier, with revenue up 35% to $5.92 billion.
After three straight quarters of 20%+ revenue growth, growth accelerated in the latest quarter, up 41% to $5.6 billion Adjusted earnings in the company’s fiscal second quarter jumped 83% to a $1.63 a share. The results easily topped the Zacks consensus estimate of $1.51 a share and revenue of $5.39 billion.
The company generated $1.19 billion in cash from operations and returned $952 million to shareholders in the quarter, including $202 million in dividends and $750 million in share repurchases.
Applied Materials also raised guidance for the current quarter. It forecast earnings of $1.70 to $1.82 a share on sales of $5.72 billion to $6.12 billion, above the consensus estimate at the time of $1.57 a share on revenue of $5.55 billion.
Fiscal 2021 earnings are expected to rise 58% from 2020, with growth decelerating in 2022, up 12%. Estimates have been heading higher.
AMAT Stock: New Markets
“Applied Materials’ record performance in the second quarter is underpinned by broad-based strength across our semiconductor businesses,” said Gary Dickerson, President and CEO. “We are confident in our ability to outperform our markets as large, secular trends create sustainable demand for semiconductors and our leadership in materials engineering becomes increasingly critical to deliver new chip technologies.”
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Last year, Dickerson said the chip industry is moving away from an era when smartphones drove the majority of semiconductor investments. He said that declines in memory chip spending should be offset by increased spending in artificial intelligence, big data and cloud infrastructure. Continued strength in Internet of Things (IoT) and automotive technology markets should also help.
In its latest fiscal year, Applied Material delivered strong annual return on equity of 21%. Annual pretax margin was also solid at 25.3%.
Applied Materials’ Composite Rating of 94 ranks it No. 7 in IBD’s chip-equipment group, according to IBD Stock Checkup. Leadership is broad in the group as several top chip-equipment stocks have turned into stock market leaders. Other top-rated stocks include Kulicke & Sofa (KLIC), KLA Corp. (KLAC) and Leaderboard stock ASML (ASML).
With the Stock Checkup, it’s easy to quickly identify the fundamental and technical leaders in a group.
AMAT Stock: Buy Or Sell?
Last year, AMAT stock soared out of a first-stage, 11-week consolidation in early November. The breakout was helped by a bullish follow-through day for the S&P 500 on Nov. 4. The S&P 500’s 2.2% gain in higher volume put the stock market in a confirmed uptrend, giving the green light for new buys. The Nasdaq composite followed through one day later, rising 2.6% in higher volume.
Currently, AMAT stock is testing support at its 50-day moving average in a 19-week consolidation. The conventional entry is 146.10, 10 cents above its April 5 intraday high. The stock is not a not a buy now with earnings right around the corner. But if the stock gaps out of its latest consolidation on strong results, a new entry could be seen.
How To Spot Market Tops
Applied Materials’ relative strength line has been trending lower as AMAT stock consolidates gains. A stock’s relative strength line, found in IBD daily and weekly charts, compares a stock’s price performance against the S&P 500. If the stock is outperforming the S&P 500, the RS line will be trending nicely higher. And vice versa.
Follow Ken Shreve on Twitter @IBD_KShreve for more stock market analysis and insight.
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