A Look at Applied Materials’ Price Ratios and Valuation

Applied Materials’ price ratios

Previously in this series, we saw that Applied Materials’ (AMAT) stock price is increasing and reaching new highs. Rivals KLA-Tencor (KLAC) and Lam Research (LRCX) have delivered similar performance. Price trends show that the stock prices are on a growth path, and are likely to stay on this path in the near term. Let’s compare these prices with the companies’ fundamentals and see if their valuation justifies their earnings potential.

A Look at Applied Materials’ Price Ratios and Valuation

Price-to-sales ratio

A company’s PS (price-to-sales) ratio tells us the amount investors are willing to pay for every dollar of a company’s sales. Applied Materials had a PS ratio of 3.7x as of May 19, 2017. This metric is lower than KLA-Tencor’s 4.6x but higher than Lam Research’s 3.4x.

Price-to-EBITDA ratio

A company’s EBIDTA (earnings before interest, tax, depreciation, and amortization) shows the outcome of its operating decisions. It removes the effect of interest paid on debt, governments’ decisions on tax rates, and non-cash items such as depreciation and amortization.

Applied Materials’ price-to-EBITDA ratio stood at 14.1x as of May 19, 2017. This metric was higher than KLA-Tencor’s 11.9x and Lam Research’s 12.0x.

Price-to-earnings ratio

A company’s PE (price-to-earnings) ratio tells us the amount investors are willing to pay for every dollar of a company’s earnings. This ratio tells us whether a stock is overvalued or undervalued compared with peers.

Applied Materials’ PE ratio stood at 18.2x as of May 19, 2017. This metric was higher than KLA-Tencor’s 17.0x and Lam Research’s 12.9x. The high ratio indicates that investors expect the company to report strong earnings in the future. Overall, investors are bullish on Applied Materials’ potential to improve its earnings.