Usually, one wouldn’t associate rapid stock price growth with a dividend-paying company. That’s because a part of the earnings generated by a dividend-paying company is returned to shareholders instead of being reinvested in growth opportunities. This typically leads to slow earnings growth and limits the potential for stock price upside…
As such, dividend stocks are usually considered to be mature and stable, while growth stocks are all about reinvesting their money back into the company for faster earnings growth. But Applied Materials (NASDAQ:AMAT) has bucked the conventions of traditional dividend stocks by delivering solid gains this year.
The good news is Applied Materials stock can deliver more upside in 2020. Here’s why.
Applied Materials’ secular growth opportunity
Applied Materials’ dividend yield of 1.44% might not seem very attractive at first considering the technology sector’s average yield of 3.20%. However, the lower dividend yield can be attributed to the stock’s terrific rise in 2019.
Now, Applied Materials didn’t do very well in its fiscal 2019 that ended in October. Its revenue and net income fell 13% and 11%, respectively, due to weak semiconductor demand, but 2020 is going to be a much better year for the company. Applied Materials forecast earnings between $0.87 per share and $0.95 per share this quarter on revenue of $4.1 billion.
The company had generated $0.81 per share in earnings on $3.75 billion in revenue in the prior-year period. Meanwhile, Wall Street was originally expecting earnings per share of $0.74 on $3.71 billion in revenue. But Applied Materials’ guidance blew past those estimates thanks to the arrival of 5G wireless networks.
Applied Materials anticipates a nice bump in demand for its chip-making equipment in the current fiscal year as the rollout of 5G networks gains momentum. Semiconductor companies will need to upgrade their equipment to churn out advanced chips that can handle the boom in traffic in data centers in the 5G era.
Allied Market Research estimates that the market for 5G chips will hit $2.1 billion next year before reaching nearly $23 billion in 2026. This opens up a secular growth opportunity for Applied Materials, as it is in the business of supplying fabrication equipment to the manufacturers that will be making those chips. This is why the company anticipates a…
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