Prognosis: One Troubled AI Shares to Acquire in December May Grant Wealth to Investors by 2025
Prognosis: One Troubled AI Shares to Acquire in December May Grant Wealth to Investors by 2025
Applied Materials (AMAT -0.43%) is among the few stocks linked to artificial intelligence (AI) that has taken a hit this year. Its shares have dropped by 37% from their all-time high, with concerns that the US government might prohibit it from selling products to China, one of its major markets, being the main cause. Besides AI, the broader semiconductor market has also experienced a downturn, affecting revenue growth for semiconductor equipment manufacturers.
This bearish sentiment presents an investment opportunity for a stock that has proven to be a goldmine for investors in the long term. The demand for Applied Materials' equipment will continue to increase as manufacturers need it to manufacture advanced computer chips, leading to increased revenue and profits for the business.
Here's why the downtrodden AI stock, Applied Materials, is set to make a comeback in 2025.
Distancing from China
The US and Chinese governments are at odds over semiconductor policies. Both countries are limiting product sales related to semiconductors to the other to gain an edge in areas like national security, such as defense spending and AI.
Applied Materials finds itself right in the middle of this conflict. The company provides equipment that allows semiconductor manufacturers to build, fabricate, and analyze their products. This advanced technology enables intricate engineering at the microscopic level, aiding companies like Nvidia and others in bringing their chip designs to market.
Despite export restrictions, Chinese companies seem to have stockpiled Applied Materials equipment in advance. In fiscal 2023 Q4, revenue from China constituted 44% of total revenue, up from the historical rate of around 30%. In the recently concluded fiscal 2024, China accounted for 37% of overall sales.
Investors are wary of this significant revenue coming from China and the potential impact of export restrictions. What if Applied Materials can't sell its equipment to such an important market? Will it lose more than a third of its revenue overnight?
AI and reshoring demand
While the China issue is a concern, it can be counteracted by the surge in AI and reshoring demand. Spending on AI data centers is soaring as tech giants compete to lead in this cutting-edge technology. These data centers rely on advanced computer chips to operate, which in turn require Applied Materials' machines for manufacturing.
The key players in the AI space manufacture chips in Taiwan, South Korea, and the US. These countries accounted for 51% of Applied Materials' revenue in the last quarter. As technology progresses, it can offset some of the revenue loss from China.
There's also the reshoring boom as the US government seeks to revive domestic semiconductor manufacturing as a national security priority. Companies are planning to invest tens of billions of dollars - likely hundreds of billions of dollars in total - over the next decade to build these factories. A significant portion of this spending will go towards equipment, such as the ones made by Applied Materials. Imports of semiconductor equipment to the US have surged in recent months, indicating this reshoring boom has already begun.
If the risks associated with China do materialize, I'm confident the growth in spending from AI and domestic manufacturing will be enough to compensate for the lost revenue for Applied Materials.
A culture of long-term success
Applied Materials has a history of treating shareholders well. It balances investing in research to maintain its technological lead in semiconductor equipment with returning capital to shareholders through buybacks and dividends. The stock has provided a nearly 500,000% return for shareholders since its IPO for a reason. That's right, almost a 500,000% total return over its 52 years as a publicly-traded company.
Over the past 10 years, the company has reduced its share count by 33%, which boosts earnings and dividends per share. The stock trades at a price-to-earnings ratio (P/E) of just below 19. Management has pledged to return 80% to 100% of its future free cash flow to shareholders through buybacks and dividends.
An attractive valuation, consistent capital returns, and strong growth prospects are a formula for long-term share price appreciation. Consider buying Applied Materials as a turnaround play for 2025 and the rest of this decade.
Investors should view the current downturn in Applied Materials as an opportunity for long-term investing in the finance sector. Despite the concerns over export restrictions to China, the company's role in the semiconductor industry, especially in the manufacturing of advanced computer chips for AI applications, positions it for significant revenue growth in the future.
The surge in AI and reshoring demand, coupled with the US government's focus on domestic semiconductor manufacturing, presents a strong counterbalance to potential loses from China. Applied Materials' history of shareholder-friendly policies, including dividends and buybacks, and its role in the reshoring boom, make it an attractive option for investors seeking long-term success.