Investors in semiconductor chip equipment maker Applied Materials (AMAT 6.35%) had a fantastic day on Friday, as a powerful earnings beat added billions of dollars to the value of their company. At least a dozen separate analysts raised their price targets on Applied Materials stock in response to the “beat,” but one rating stands out:
On Friday, Susquehanna Financial Group analyst Mehdi Hosseini raised his price target to $160 per share, as StreetInsider.com reports.
And this implies that Applied Materials stock may go down 22%.
Upgrading Applied Materials
Applied Materials stock is worth north of $200 a share as of this writing. For it to reach Hosseini’s new (and improved) price target of $160 a share would require the stock price to go down, not up. So why does Hosseini think this will happen?
As the analyst explained, half of the money Applied Materials made in 2023 came from machinery exports to China, at above-average profit margins. The problem is that going forward, Hosseini believes these extra-profitable Chinese sales will shrink to represent between 35% and 40% of Applied Materials’ revenues.
Is Applied Materials a sell?
It doesn’t take a market genius to figure out what that means for Applied Materials stock. If Hosseini is right in his predictions, sales could fall steeply after China has bought most of the machines it needs, and profit margins could fall even faster.
Long story short, Hosseini sees Applied Materials earning $8.07 per share this year, implying a forward-looking 25x P/E ratio on the stock. That’s not terribly expensive. But if profit margins decline — the analyst forecasts a 120 basis point decline in gross margins in H2 2024 — and sales might fall as well, then it’s only logical that Applied Materials stock price should fall, too.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Applied Materials. The Motley Fool has a disclosure policy.
