$AMAT - DCF model
Applied Materials Inc
Valuation suggests that the stock is trading at 4% premium to my fair value estimate. No alpha is expected to be generated from this stock.
Key assumptions:
Explicit initial 5Y growth @ 6%, subsequent 5Y-10Y @ 5% (https://seekingalpha.com/article/4824358-applied-materials-valuation-upside-exists-but-im-awaiting-clarity-on-china)
I am using growth rates that are unarguably below the historical average. This is because there is increasing risk and evidence in parts of its business (notably China, certain process tool categories) that AMAT could lose share to local competitors or underperform the broader equipment market.
Long-term growth in perpetuity @ 2.6% (Global economic growth projection https://www.pwc.com/gx/en/world-2050/assets/pwc-the-world-in-2050-full-report-feb-2017.pdf)
WACC @ 8.3%
For relative valuation: an EBITDA exit multiple of 17.7 of the Semiconductor industry (http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/vebitda.html)
Reinvestment: The input that drives reinvestment is the most recent Sales to Capital ratio = 1.1
Why the bull case can work out well
Secular tailwinds from AI and advanced semiconductors
China and localization risk already priced in
Operating leverage & margin expansion
Capital return (buybacks + dividends)
Resilience vs. peers
Upside optionality from new businesses
Multiple re-rating
Better-than-expected WFE cycle
What can go wrong
China dependency & geopolitical risks
Semiconductor capex downturn (WFE cycle risk)
Margin pressure
Technological disruption
Execution risk on new opportunities
Regulatory & tax headwinds
Capital return not enough to support valuation
Multiple compression
Macro shocks
Sensitivity
If you disagree with me on certain aspects, you can choose your own assumptions using the tables below.
Base case + Bear case + Bull case
Sensitivity table
Conclusion: Entry can still be justified, since this is a great company with wide moat, trading at fair value.