Applied Materials Shares Run Into Key Long-Term Resistance

Applied Materials, Inc. AMAT bulls have been given a bit of a reprieve, at least temporarily, by the market as the powerful rally over the last week has lifted even the beleaguered Applied Materials stock nearly 10 percent.

The obvious question is whether the upside momentum can truly continue for shares, and for the broader technology complex.

What The Bulls See

• An attractive valuation profile: A price-to-earnings of around 16, which seems reasonable considering the estimated growth in EPS of 27.4 percent for 2015 and a price-to-sales ratio of 2.84.
• Double-digit profit margins that leads to levered free cash flow of over $1 billion annually.
• Cash of $2.87 billion versus only $1.95 billion in total debt.
• A debt-to-equity ratio of only 25.34 percent.
• A current ratio of 2.41.
• An annual dividend of 2 percent.

What The Bears See

• A rich price-to-book ratio of 3.25.
• A meager revenue growth estimate for 2015 of 9 percent.
• A market capitalization of $25.49 billion that exceeds the enterprise value of $24.04 billion.
• A potentially weak technical set-up.

Technical Take

Technicians note that Applied Materials shares have bounced right up to substantial dual resistance created by the underbelly of the broken uptrend line on the weekly chart (the dark blue line on the chart) along with the horizontal line created by the early-August weekly closing low at $20.90. A close above that level, especially on a weekly basis, will likely lead to a continued move up towards $23-$24.

However, a failure to eclipse the resistance level could lead to a move down towards the projected support at $18.27 (a Fibonacci projection which happens to correspond nicely with horizontal line support).

Disclosure: Sea Change Capital is short of Applied Materials shares (on a trading basis) at the time this article was written.