Applied Materials' 2020 Goal 'Looks Conservative,' Needham Says In Upgrade

Armed with increased conviction, Needham upgraded shares of Applied Materials, Inc. AMAT. The company's shares have made a strong run over the past year. 

The Analyst

Needham analyst Edwin Mok upgraded shares of Applied Materials from Buy to Strong Buy and increased the price target from $66 to $72.

The analyst also named Applied Materials as his favorite large-cap semi-cap for calendar 2018.

The Thesis

Applied Materials' broad-based exposure is likely to support solid growth in the coming year, Mok said in a Monday note. (See Mok's track record here.) 

The company's WFE mix is more balanced in 2018, with the logic and memory split of its semi business at 52 percent and 48 percent, respectively, the analyst said. 

"Based on AMAT's stronger positions in foundry/logic and increased logic content in DRAM, we believe AMAT's semi business stands to outperform the industry." 

The display business could deliver upside above already-robust guidance, Mok said. Market expansion is the biggest growth driver in Needham's view, with multiple new display lines being built.

With 13 large LCD and more than 20 OLED projects in various stages of development, Mok said he expects a sizable ramp of the display equipment market, supporting the upside to the company's guidance.

Needham now sees increased visibility into the company's calendar 2020 target of $19.6 billion and NG earnings per share of $5.08. The 29.3-percent incremental operating margin suggested by the 2020 is "conservative," Mok said. 

The possibility of the company achieving $5-plus in earnings per share ahead of the plan, thanks in part to the new tax law allowing the acceleration of share repurchasing, could support a higher share price, the analyst said. 

The Price Action

Applied Materials shares have rallied over 72 percent in the last year. 

At the time of publication, the shares were adding 3.21 percent to $56.35. 

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Photo courtesy of Applied Materials.