AMAT upgraded to buy on valuation discount and fundamental strength; conviction is low.

Applied Materials is experiencing increased demand as a result of the AI-driven infrastructure race. The company announced revenue growth of 25% year-on-year in its most recent fiscal quarter, and expects growth to accelerate to 51% in the next quarter.

So, does this make Applied Materials stock a buying opportunity? On August 6, I evaluated Applied Materials stock and informed investors that it did not appear to be a buying opportunity at that time.

Business was certainly thriving, but the rating was a little high in my opinion.

This proved to be the right decision, as Applied Materials' stock fell by 22% over the past month.

So, does this low price make the stock more attractive now? I think it has become more attractive, but let's see if it goes beyond that to rise to the level of a buying opportunity.

You mentioned that revenues are booming at Applied Materials, reaching $31 billion over the past 12 months. This represents an increase of approximately three times what it was in 2017 at around $10 billion .

Given the multi-year cycle we are currently experiencing, Applied Materials revenues are likely to continue rising for at least several more years. Business is booming with a long-term outlook now , as semiconductor buyers look to secure demand for their products for several years into the future.

This change in the way customers order this technology allows companies like Applied Materials to better plan for future demand.

The company invests heavily to expand its capabilities and availability because it is confident that its customers want its products and services.

Whenever I see a thriving business like Applied Materials, I like to look at the operating profit margins to see if the company is generating revenue at the expense of profitability.

This is certainly not the case with Applied Materials.

Not only is it growing in revenue , but it has also expanded its operating profit margin to 31% over the past 12 months, up from about 20% in 2017. This is a clear sign of organic demand for the company’s products and services.

This is not the result of increased advertising, promotions, incentives, or any other promotional activity to stimulate sales of its products and services. These full-price sales generate significant demand.

This also improves profitability because they are utilizing almost 100% of their available capacity.

Therefore, this is not an asset-light business model. Applied Materials management is increasing capital investment to meet the growing demand for its products and services.

When I see that, I look at return on invested capital as a more important metric for companies like these. The good news for investors is that Applied Materials' management team has been effective in allocating capital.

And this is not just a recent phenomenon. They have proven that over the past decade.

The total return on invested capital was approximately 15% in 2017, a level equal to or exceeding their weighted average cost of capital . This metric improved as the contract progressed and the company's revenues increased.

Therefore, it is reasonable to assume that the investments the company is currently making to meet future demand will generate sufficient returns on invested capital to increase shareholder value.

When I reviewed Applied Materials a little over a month ago, the review was much more expensive. In fact, the valuation reached a high level where the forward price-to-earnings ratio approached 40.

I warned investors at the time that this price was a little overpriced for this business. You have been paying maximum valuations for maximum earnings per share. Therefore, she warned that it is best to wait for the price to decline before buying the stock.

And if you are patient, you are now getting that pullback we have been waiting for.

Applied Materials is now trading at a forward price-to-earnings ratio of 22.7, which is slightly below the average valuation at which the stock has traded over the past few years.

This is a more attractive valuation, and is even considered a valuation below fair value given the company’s characteristics in terms of revenue, profit margins, and return on invested capital.

I also updated Applied Materials' discounted cash flow model , and the biggest changes were increases in the expected free cash flow that the business will generate over the next few years, as demand for their products and industry demand is better than it was a month, two months, or three months ago.

As 2026 progressed, demand estimates and actual order numbers and demand for these types of products increased more than I had estimated at the beginning of this year. Based on these reviews, Applied Materials is now a fair-valued stock when including my margin of safety when measured using the discounted cash flow model .

The fair value I calculated is 378. The current market price is 417. So, applying a margin of safety of approximately 10% to 15% , I can say that the stock appears to be valued at its fair value or slightly overvalued using the discounted cash flow model.

But when looking at the valuation as a whole, which also includes market multiples and other metrics, the stock appears to be valued at its fair value to slightly undervalued .

So on August 6 , I didn't think this was a buying opportunity, but today with a discount of more than 20%, I am upgrading my rating on Applied Materials stock to " buy".

I still have a relatively low conviction about this ranking, given the speed and dynamism of the changing AI market , and I don't follow this company as closely as I would like to .

I would like to know more before my confidence and conviction in this purchase rating increases.

Now that business is booming and I'm upgrading its rating, I think I'll be spending more time evaluating Applied Materials.