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Cash flow trends further reinforce that disciplined narrative. Applied Materials had $925 million in operating cash flow and $544 million in free cash flow in FQ1'25. Though these figures are lower sequentially, they are healthy and consistent with a seasonal pattern and not the result of any structural shift, given that the company continues to generate well above what it is required to pay in shareholder commitments. In FQ1'25, Applied Materials returned $1.64 billion to shareholders, which is almost 3 times its free cash flow, with $1.32 billion spent on share repurchases.This aggressive buyback activity is the manifestation of high conviction in long-term value and a shareholder-friendly capital strategy.

Furthermore, Applied Materials is in solid shape on the balance sheet. In the quarter, it had a total cash and investments balance of $10.9 billion, including $6.3 billion in cash and equivalents. It has $6.26 billion of total debt and this strong liquidity cushion helps offset this debt, giving the company a net cash position of around $4.6 billion. Moreover, its investment-grade ratings (P-1/A-1 short-term; A2/A long-term) underscore its financial strength and flexibility.

In summary, Applied Materials started this year with a disciplined and growth-oriented quarter. As it turns out, the company is executing well on both the growth and efficiency lines, a theme that investors might find appealing in the current margin-conscious tech environment.

Sustained multi-year growth underpins long-term confidence

Zooming out, Applied Materials has performed consistently and profitably over the past five years. Revenue has increased from $17.2 billion in FY'20 to $27.6 billion TTM, a 60% increase, and a strong ~10% CAGR. The gross profit mirrors the pattern, surging from $7.7 billion to $13.2 billion over the same period, a 71% gain that exceeded revenue growth, indicating increased gross margin efficiency.

Net income increased from $3.6 billion in FY'20 to a peak of $7.2 billion in FY'24 and has softened slightly to $6.34 billion TTM, still up 75% over five years. This dip looks more tactical, given recent reinvestment and seasonal free cash flow changes.

The most striking factor is consistency. The combination of long-term trends of scalable growth, margin expansion, and capital discipline reinforces that the company is delivering well.

Healthy free cash flow despite tactical dip

With a 10-year CAGR of about 24% and a staggering 26.5% CAGR over the past 5 years, free cash flow per share has grown faster than earnings and has reinforced strong cash conversion. While FY'24 was down slightly from $7.59 to $7.49 per share, a 1.4% drop, it aligns with typical seasonal softness in the FQ1'25 and elevated shareholder returns. This upward long-term trajectory is simply maintained by operating cash flows and capital-light scaling.

Reliable, growing dividend with ample headroom

Applied Materials's dividend profile offers both stability and upside. The forward yield is 1.43% with a low payout ratio of 17.96%, so there is plenty of room for growth. The company has been growing its dividend for 7 years in a row and the five-year CAGR is 13.75%. They also expect a massive 48% YoY increase to $2.13 in FY'25. Even with forecasted normalization to $1.94 in FY'27, the trajectory shows a commitment to shareholder value while not making an investment sacrifice. This dividend strategy creates a balance between yield and long-term growth potential, backed by strong FCF and balance sheet flexibility.

Applied Materials offers a rare blend of quality and value

Right now, Applied Materials looks like a place for value investors. At $138.6 per share, it's trading at less than several intrinsic value estimates, including a GF Value of $156.80, which is based on a data-driven blend of historical multiples, future growth projections, and past performance. That's a 13.15% gap suggesting AMAT may be underestimated in terms of its long-term potential.

If we step back and look at fair value models, they just step up the valuation front. Discounted cash flow models, both earnings and free cash flow-based, place the stock value anywhere from $223 to $278. Even more cautious measures like the projected FCF and price-to-sales metrics still exceed today's price. Across these models, it is a consistent signal that Applied Materials appears undervalued.

Then there's the P/E multiple. The forward P/E of 15.97 times is below the sector median by 18%, and a full 13% below Applied Materials' own five-year average. It's unusually cheap for a company with a market position like that in an industry that's so important to tech infrastructure.

In short, the company is a disconnect between market mood and fundamentals. And that is where opportunity often lives.

Peer comparison

Applied Materials looks like an excellent value pick compared to its peers, KLA Corp (KLAC, Financial) and Lam Research Corp (LRCX, Financial). Applied Materials is trading at a discount to its GF Value of $156.80 and appears to be attractive relative to its peers, as GF value of LAM Research is 64.37 with a current price of 64.7, and KLAC stands as $645.8 with a GF value of 568.92, indicating overvaluation. This shows that the market may be underpricing Applied Materials' earnings potential. Also, Lam Research and KLA are both currently more expensive at forward earnings of 18.96 times and 22.34 times, respectively, which are both considerably higher.

The value case also gets support from the price-to-sales metric. The ratio for Applied Materials of 4.46 times is much more reasonable than for KLAC at 8.70 times and LRCX at 5.70 times, so you are paying less for each dollar of revenue.

While both KLAC and LRCX are top-tier in their respective segments, Applied Materials seems to have the best value and potential upside. The stock is trading at a discount to its intrinsic value and has room to re-rate if sentiment improves.

Source: Author generated based on historical data

Applied Materials future predictable growth with attractive valuation

Looking out to 2027, Applied Materials seems set for a steady and healthy growth path. It is expected that EPS will increase from $9.37 in FY2025 to $11.06 in FY2027 with annual growth in the range of 8-9%. That may not be flashy, but it's consistent, and in a cyclical industry like semiconductors, consistency is extremely underrated.

Source: EPS estimates (Seeking Alpha)

The same story is represented by the revenue growth, as it moves from $28.8 billion to $32.7 billion, up 6% annually. Again, not a rocket ship, but steady upward momentum.

Source: Revenue estimates (Seeking Alpha)

The implied forward P/E adds to that. The stock is expected to be trading at 13.54 times earnings by 2027. For a company with such stable growth, it is very modest. This scenario creates an amazing opening for long term investors.

How high Applied Materials stock could climb in the next year?

Applied Materials' strong fundamentals and undervalued should provide for a significant upside to the stock over the next year, depending on how sentiment shifts.

In a base case, we could find a moderate and significant gain. For FY 2026, analysts project EPS of $10.13 and if the market re-rates Applied Materials even slightly, say to 17 times forward P/E, which is still below the five-year average, it would imply a price of about $172. That's a 25% upside. That kind of re-rating isn't unreasonable given the company's consistent earnings growth and strong cash flows. Even if sentiment stays muted and the stock trades at the current estimated forward P/E of 14.7, it gets you around $141, a little upside while still participating in earnings growth.

In a bull case scenario, if investors become more bullish on semi-equipment names or cash flow strength starts to be priced in, then we could see a forward multiple of about 21, especially if macro drivers such as AI and chip subsidies boost sentiment for the sector. That would imply a price near $212.7, which would align with some DCF estimates well above $180. That's nearly 54% upside.

Source: Author generated

Even when we look at analysts' forecasts, they are bullish, with an average 12-month price target of $207.42, implying almost 50% upside from where the stock is today.

Timing is lauded, but with consistent growth and a modest valuation, Applied Materials doesn't require a perfect storm. Just a little push will do the work.

Applied Materials: A Diversified Moat in a Concentrated Market

The case for Applied Materials remains strong on valuation. It is, however, important to also look past the "cheap" stock price and take a deeper view of the value and competitive position Applied Materials provides.

A Diversified Product Portfolio That Mitigates Cyclical Risks: As a leading supplier of wafer fabrication equipment (WFE) in a highly concentrated industry, competing with a few other major competitors. Though ASML Holdings (ASML, Financial) leads the discussion in EUV lithography, Applied Materials has a much broader portfolio of solutions for deposition, etch, and inspection/measurement tools along the way. This diversification is a huge advantage because it makes Applied Materials less dependent on specific technology cycles and allows it to serve a wider range of chip types and customers' needs. Applied Materials's performance is not dependent on any single technology shift, and this makes its performance somewhat more immune to industry transitions.

R&D-Driven Innovation Keeps Applied Materials Future-Proof: Additionally, Applied Materials's involvement in significant R&D investments has also been paid off well. The company relies on 40% of its revenues on the products launched during the past three years and is continuously adapting to technologies such as 3D NAND and FinFET transistors. Applied Materials focuses on future-proofing and that helps them to maintain a competitive edge in a rapidly evolving market.

Recurring Revenue Model Strengthens Long-Term Profitability: Applied Materials's recurring revenue model is one aspect that deserves more attention in particular as the company is moving quickly to service and maintenance revenue. This is also where the company starts to differentiate itself from ASML, which is more dependent on equipment sales. Since Applied Materials's customer base is expanding, especially in countries such as Japan, China, and the U.S., its service-based revenue will continue to add more to the long-term profitability. Also, Applied Materials's entrance into advanced packaging, evidenced by its recent 9% stake in BE Semiconductor (BESI) proves that Applied Materials is trying to expand into AI and high-performance computing markets. For stacking of chips vertically, the next-gen packaging technology is vital, and it could make possible new avenues of growth as the demand for advanced chips rises.

So, while Applied Materials doesn't have as much of a monopoly in EUV lithography as ASML, and no doubt ASML is as good of an investment, Applied Materials has a diversified portfolio and good recurring revenue streams and it's very well-positioned for continued growth.

Also, if Applied Materials repeat its past success of increasing per-share free cash flow, the stock's low P/E may not be the only driver of future returns. So Applied Materials's long-term upside will likely also come from continued revenue growth, helped by the addition of important growth areas such as advanced packaging and recurring service revenue.

Insider activity suggests quiet confidence

In terms of insider activity as a confidence signal, Applied Materials looks more bullish in my view. Applied Materials seems quite different compared to other stocks that I've recently analyzed where the insider selling is way more dominant than the buying. It's the only company of the past 4-5 companies I've reviewed where insider buying has taken place at all. There have been insider sales, but that is standard everywhere in the market. That doesn't necessarily mean negative sentiment, as executives usually cash in after strong price runs. What matters is that over the last three years, insiders have bought 50K shares, which is worth noting in today's cautious market environment.

Guru activity signals institutional endorsement

The sentiment becomes even stronger when we shift to the activity of gurus. Big names like Scott Black (Trades, Portfolio) (Trades, Portfolio) , Ken Fisher (Trades, Portfolio) (Trades, Portfolio) , and the Parnassus Value Equity Fund (Trades, Portfolio) (Trades, Portfolio) have been increasing their positions on the stock. A notable +1.26% contribution was made by Parnassus, even initiating a fresh buy. Jefferies Group (Trades, Portfolio) (Trades, Portfolio) made a huge addition as well, although the portfolio impact was modest, the size of the trade says a lot about their conviction. These strategic purchases offset the insider selling, so there is a net-positive tone from the smart money.

Jefferies upgrade underscores industry tailwinds: In fact, Jefferies' confidence was also echoed in their March 28 move when they upgraded Applied Materials from Hold to Buy and raised their price target from $185 to $195. A strengthening outlook for the wafer fabrication equipment space backed that call, triggering about 1% bump in the stock in after-hours trading. In particular, Jefferies noted Applied Materials' DRAM exposure as a specific focus, and that AMAT's risk from China is relatively limited, which sets it apart while heading into earnings season.

Risks to my thesis

I am bullish on Applied Materials, but there are of course some risks to keep in mind.

The first is the ongoing U.S.-China trade tensions, that have brought Applied Materials into the gun sights. As China is one of its largest markets, any new tariffs or export restrictions could really muddy the waters regarding future sales. Planning ahead is hard when policy is ever circling the drain. Such uncertainty can be heavy on a company that relies on orders for long-term equipment and on stability of its global supply chain.

Then there's the DRAM/AI bet. A lot of optimism is baked into Applied Materials' outlook based on a coming wave of AI-driven DRAM demand. If that is a ripple or is delayed, growth could be below expectations. That doesn't mean Applied Materials implodes, but it's a situation where the stock won't carve out as many gains just when the market is slowly pricing in some upside.

Lastly, some of the analysts, such as Morgan Stanley, are saying that 2025 can be treated as a transitional year for semi-capex. The problem is that fabs could send out spending, slowing the pace of new equipment orders. Applied Materials could feel pressure in the near term if broader semi-investments stall for longer than expected.

Your Takeaway

Although doing so behind the scenes, Applied Materials is delivering what long-term investors want; consistent growth, margin expansion, and disciplined capital returns. The company isn't just getting the benefits of one tech trend, it is diversified across tools, geographies, and customers, and leaning on future growth fields like AI and advanced packaging. There is quiet confidence surrounding it, with rising dividends, a rock-solid balance sheet, and insider and institutional backing. The market appears to be overlooking its steady execution and future upside at today's valuation. As is always the case, there are risks here, but Applied Materials doesn't have to live in a perfect environment to outperform, it just needs a little more recognition. This may be one of those rare moments where quality and value quietly intersect.

This article first appeared on GuruFocus.