Everyone essentially gave up on the semiconductor stocks since the demand for chips came down due to bottlenecks caused by disrupted supply chains during the peak months of the COVID-19 pandemic. Now that the United States economy is staring down a likely boom in the manufacturing sector, alongside heating trends in the A.I. space, having enough chip supply is more critical than ever.
The trends have now become so apparent in their direction that one of Wall Street’s most respected investors has decided to plunge into the space. While some just rode the tail of Warren Buffett in his previous approval of Taiwan Semiconductor Manufacturing (NYSE: TSM), there are enough reasons for you to consider – like Ray Dalio did – Applied Materials (NASDAQ: AMAT) stock instead.
As a matter of fact, Buffett shocked markets by selling all of his Taiwan stake. Today, both markets as a whole and Wall Street analysts come to celebrate Dalio’s new purchase by leaving you with enough evidence as to why it could be a worthwhile name to add to your watchlist. But first, a bit of context for you to relay in your next cocktail party, or for you to feel more comfortable connecting the dots.
What drove Dalio here?
Known as the best macro investor out there, you can bet that Ray Dalio considered all things global. With the rising geopolitical tensions between China and the United States today, most concerns relate to the potential of a Chinese invasion of Taiwan, seriously threatening Taiwan Semiconductor’s facilities, which may be one of the reasons why Buffett got out.
With Taiwan out of the picture, at least for now, customers and suppliers were likely left scrambling around for the next best player to replace the supply link. This is why you saw Arm (NASDAQ: ARM) stock double recently, as investors bet that markets would find a safe place in the stock to replace Taiwan.
Being a value investor, Dalio wouldn’t just pick Arm stock as his newest bet; after all, it isn’t likely that he saw the stock’s 44.2x price-to-sales multiple as having much upside left.
So if he felt comfortable enough to increase his stake in Applied Materials by as much as 152.5% as of February 15th, then you should think at least a bit of curiosity as to whether it is too late for the party or if you, too, could benefit from the next leg up.
Well, you won’t have to wonder any longer because MarketBeat has done the homework to give you all the reasons you can still get into this play today. Analysts at The Goldman Sachs Group (NYSE: GS) said they expect a breakout of the manufacturing sector in the U.S.
Unless they still operate under industrial revolution technology, today’s factories need a lot of chips to deliver this breakout. You can read this opinion in Goldman’s 2024 macro outlook report here.
What’s the outlook?
Over the past month alone, the VanEck Semiconductor ETF (NASDAQ: SMH) has outperformed the broader S&P 500 index by as much as 10.5%; while the explosion in Arm has mainly driven that performance, you can expect an overflow contagion into other names like Applied Materials.
By the way, Buffett is not the only one who decided to reduce the risks involved with Taiwan Semiconductor; the Vanguard Group also sold as much as 9.2% of its stake on the exact reported dates that Dalio bought Applied Materials stock. Seeing the writing on the wall, here’s what analysts think.
Is it a coincidence that Goldman analysts, the same ones pushing for a breakout in manufacturing (the one that could spark new demand for chips), are the same ones boosting their price target on Applied Materials stock? Left to interpretation, a $220.0 share price target now calls for a 15.0% upside from today’s prices.
Compared to the former king of chips, Taiwan Semiconductor, analysts now see a price target of only $128.5 a share. This valuation is only 1.2% above where the stock trades today, reflecting a fair value and little upside left, especially now that the big players are ditching the stock.
Back to valuation, the semiconductor industry trades at an average price-to-earnings ratio of 15.7x today. Remember the saying “It must be expensive for a reason” when looking at Applied Materials stock.
With a 24.5x, it is not only 56.4% above the industry average, but that stock also commands a premium valuation of 19.7% over its competitor, Taiwan Semiconductor, which trades at 20.5x. Now you know the reasons for a market's willingness to overpay.
