Speculation that Apple (AAPL) - Get Report will begin using organic light-emitting diode, or OLED, displays in its mobile devices means Applied Materials is set to make massive gains, because it makes equipment used in the manufacturing of those displays. Shares of Applied Materials are up 31% already this year.
Many market participants are raving about the stock's stellar market-beating possibilities after the company delivered better-than-expected earnings and raised its guidance.
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Applied Materials has already revealed in its fiscal second-quarter earnings that OLED equipment orders were at an all-time peak. The company also said its opportunity in OLED is more than three times larger than for traditional liquid crystal displays, or LCDs.
That is why Wall Street is excited about Applied Materials. With OLED equipment being more difficult to build than LCD, it offers a moat for companies like Applied Materials, which manufactures complicated technology that OLED manufacturers rely upon.
Why is Apple rumored to be planning to use OLED? OLED displays offer better color contrast and more bendability. Apple's iPhone 7 is expected to have OLED display features. OLED has the potential to make up around 15%-20% of Applied Materials' business.
Applied Materials is quickly shifting gears. Analysts expect the company to clock 16%-plus earnings per share growth every year for the next five years, a rate which is almost two times faster than the 8.7% run rate for the previous five years.
Let's see how chip equipment peers stand against Applied Materials in terms of earnings growth projections. Lam Research (LRCX) - Get Report is projected to deliver 13%-plus growth in EPS over the next five years, while KLA-Tencor (KLAC) - Get Report is expected to 21% growth, up from -6.99% in the previous five years. Axcelis (ACLS) - Get Report is expected to see 20% growth in the next five years, vs. -26% over the past five.
Recent earnings have shown how Applied Materials has been consistent in performance. Its fiscal second-quarter adjusted EPS of 34 cents beat analyst estimates by 2 cents. Revenue of $2.45 billion (up 0.4% year over year) beat estimates by $20 million. Orders showed 37% year-over-year growth to $3.45 billion.
Wall Street was surprised when Applied Materials said it expects 14%-18% quarter-on-quarter third-quarter revenue growth and adjusted EPS of 46 cents to 50 cents. This is far ahead of the consensus, which was for just 2% quarter-over-quarter revenue growth and adjusted EPS of 36 cents.
China, a sore point for most companies in its space, was a bright banner for Applied Materials. For many, it remains one of the best-positioned companies in the semiconductor equipment space. Besides OLED, AMAT's 3D flash memory segment is also going strong.
There's no doubt about it: Applied Materials is a hot stock on an upward trajectory. Improvements in Applied's business are being compelled by semiconductor companies' emphasis on progressing their manufacturing methods to stay competitive with rivals.
At a PEG ratio of 0.99, Applied Materials is a value buy even after moving up by one-third since last year. Add to that, the 1.6% yield, a low payout ratio and six years of dividend growth, and what you get is a solid opportunity to make money.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.