2024 is the year of recovery for the global semiconductor industry. Applied Materials, Inc. (AMAT), the leader in core equipment suppliers in this field, recently released its third fiscal quarter financial report. This positive news came quickly This led to a significant increase in its share price. Last week, Applied Materials’ stock price performance was particularly strong, with a cumulative gain of 8.7% for the week.

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Good financial results drove stock prices soaring

On August 15, Eastern Time, Applied Materials released its financial report for the third fiscal quarter of 2024 (ending June 2024). The report showed that the company's revenue in the quarter increased by 5% year-on-year to $6.78 billion. Applied Materials' total revenue in the first half of 2024 was US$13.43 billion, surpassing ASML and regaining the top spot in global semiconductor equipment company revenue.

From the perspective of the product application market, Applied Materials' revenue growth in the first half of the year was mainly due to the strong demand for memory chip equipment. In the third quarter, the company's DRAM equipment revenue increased by nearly 50% year-on-year, and NAND equipment revenue increased by 10% year-on-year, making particularly outstanding contributions. In the second quarter, DRAM equipment also performed well, and the contribution of advanced packaging-related equipment further boosted the company's revenue growth. The financial report shows that Applied Materials expects revenue from advanced packaging to grow to US$1.7 billion in 2024, including US$600 million in revenue from high-bandwidth memory (HBM). This expectation shows the company's optimism about the market prospects and its confidence in its product line.

The financial report shows that Applied Materials expects revenue from advanced packaging to grow to US$1.7 billion in 2024, including US$600 million in revenue from high-bandwidth memory (HBM). This expectation shows the company's optimism about the market prospects and its confidence in its product line.

Successfully surpassed ASML and became the world's number one?

Surprisingly, ASML experienced year-over-year revenue declines in both the first two quarters of 2024. In the first quarter, revenue fell by 21% year-on-year, and net profit fell by 37.4% year-on-year. In the second quarter, revenue fell by 9.6% year-on-year, and net profit fell by 18.7% year-on-year. The decline in revenue was mainly affected by reduced orders from TSMC and Korean customers.

With its early market layout and comprehensive production lines, Applied Materials has long occupied the top spot in sales among global semiconductor equipment companies. However, in 2023, ASML surpassed Applied Materials for the first time with revenue of US$29.83 billion, becoming the world's largest semiconductor equipment supplier. ASML's main business is lithography equipment, while Applied Materials produces equipment including epitaxy, ion implantation, deposition and selective material removal. In 2023, ASML sold 53 low numerical aperture (Low-NA) EUV Twinscan NXE lithography machines and 125 deep ultraviolet lithography machines (Deep Ultraviolet Lithography), which provided the basis for it to become an industry leader. Solid sales foundation. In contrast, Applied Materials, due to its broader product line, has been greatly affected by the U.S. export rules that will take effect in October 2023, which to a certain extent limited its sales performance that year.

How much growth potential does Applied Materials have?

A company's growth rate is closely related to its return on equity (ROE) and profit retention strategy. Generally speaking, companies with higher ROE and higher profit retention tend to exhibit faster growth.

Applied Materials' ROE is as high as 40%, an indicator that has played a key role in the company's 20% net profit growth over the past five years. Looking further at Applied Materials' dividend payout strategy, its three-year median dividend payout ratio is only 15%, which means the company reinvests 85% of its profits in the business, showing management's emphasis on business growth. Furthermore, considering Applied Materials' track record of paying consistent dividends for at least a decade, the company has demonstrated a strong determination to share its profits with shareholders. Based on current analyst consensus estimates, the company's dividend payout ratio is expected to rise to 19% over the next three years, and despite the increase, the company's ROE is expected to remain stable.

Although its recent growth performance is still slightly below the industry average, Applied Materials' high ROE and profit retention strategy provide a solid foundation for its growth. When evaluating the future of a company's stock, investors should comprehensively consider factors such as the company's earnings growth expectations, market pricing, and dividend payment strategy.

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