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Applied Materials (AMAT 1.33%) is one of the few stocks related to artificial intelligence (AI) that has retreated this year. Shares are down 37% from their all-time high as of this writing. The equipment supplier for semiconductor manufacturing facilities is getting hit over fears the U.S. government will bar it from selling products to China, one of its most important markets. Outside of AI, the wider semiconductor market has gone through a downturn, hurting revenue growth for semiconductor equipment makers.
The shortsighted thinking driving this sell-off creates a buying opportunity for a stock that has made investors a fortune over the long term. Manufacturers will need more and more of Applied Materials’ equipment to keep making advanced computer chips, which will lead to increased revenue and profits for the business.
Here’s why beaten-down AI stock Applied Materials is set to bounce back in 2025.
Breaking away from China
The U.S. and Chinese governments are at odds over semiconductor policies. Both countries are steadily restricting product sales related to semiconductors to the other in order to get an advantage in national security areas such as defense spending and AI.
Applied Materials is right in the middle of this conflict. The company sells equipment that allows semiconductor manufacturers to build, shape, and analyze their products. This is highly advanced technology that enables complicated engineering to happen at the microscopic level, helping the likes of Nvidia and other computer chip companies bring their designs to market.
In the face of these export restrictions, it looks like Chinese companies ordered a bunch of Applied Materials equipment in advance. Revenue from China hit 44% of overall revenue in fiscal 2023 Q4 compared to a historical rate of around 30%. And in the recently ended fiscal 2024, revenue from China made up 37% of overall sales.
Investors see this large chunk of revenue coming from China and worry about the export restrictions. What happens if Applied Materials can’t sell its equipment to such an important market? Will it lose more than a third of its revenue overnight?
AI and reshoring demand
While the China restrictions are a concern to keep track of, I believe they can be more than made up through AI and reshoring demand. AI data center spending is exploding higher as the big technology players race to stay ahead in this exciting new technology. All these data centers require advanced computer chips to operate, and those chips need the use of Applied Materials machines to be manufactured.
The key players in the AI space produce chips in Taiwan, South Korea, and the U.S. Combined, these countries made up 51% of Applied Materials’ revenue last quarter. As the technology grows, it can offset some of the revenue decline from China.
There is also the reshoring boom as the U.S. government tries to revive domestic semiconductor manufacturing as a national security priority. Companies are slated to spend tens of billions of dollars — likely hundreds of billions of dollars in total — over the next decade in order to build these factories. A lot of this spending will be on equipment machines, such as the ones made by Applied Materials. Imports of semiconductor equipment to the U.S. have exploded higher in the last few months, indicating this boom in spending has already begun.
If the risks around China do fully materialize, I have faith the boost in spending from AI and American manufacturing will be able to replace the lost revenue for Applied Materials.
A long-term culture of success
Applied Materials has a long history of treating shareholders well. It simultaneously invests in research to maintain its technological lead in semiconductor equipment while also returning capital to shareholders through buybacks and dividends. The stock has returned nearly 500,000% for shareholders since its IPO for a reason. Yes, you read that right — close to a 500,000% total return over its 52 years as a publicly-traded company.
Data by YCharts.
And over the last 10 years, the company has brought its share count down by 33%, which helps boost earnings and dividends per share. Today, the stock trades at a price-to-earnings ratio (P/E) of just below 19. Management has committed to returning 80% to 100% of its future free cash flow to shareholders through buybacks and dividends.
An attractive valuation, consistent capital returns, and strong growth prospects are a recipe for long-term share price appreciation. Buy Applied Materials as a turnaround play for 2025 and the rest of this decade.
Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Applied Materials and Nvidia. The Motley Fool has a disclosure policy.
