Ray Dalio likes Applied Materials stock this cycle

Everyone has essentially given up on semiconductor stocks as demand for chips has fallen due to bottlenecks caused by disrupted supply chains during the peak months of the COVID-19 pandemic. Now that the U.S. economy grapples with a likely boom in the manufacturing sector, along with warming trends in the artificial intelligence sector, having a sufficient supply of chips is more important than ever.

The trends have become so obvious in their direction that one of Wall Street’s most respected investors has decided to dive into this space. While some simply followed Warren Buffett’s tail in his previous endorsement Taiwan semiconductor manufacturing New York Stock Exchange: TSMthere are sufficient reasons to consider – as Ray Dalio did – Applied materials NASDAQ: AMAT warehouse instead.

As a matter of fact, Buffett shocked the markets by selling his entire stake in Taiwan. Today, both the markets as a whole and Wall Street analysts come to celebrate Dalio’s new purchase leaving you with enough evidence as to why he might be a worthwhile name to add to your watch list. But first, a little context to convey at your next cocktail party, or to feel more comfortable connecting the dots.

What brought Dalio here?

Known as the best macro investor around, you can bet that Ray Dalio considered all things global. With the current rising geopolitical tension between China and the United States, most concerns are about China’s potential invasion of Taiwan, seriously threatening Taiwan Semiconductor’s facilities, and this may be one of the reasons why Buffett left.

With Taiwan out of the picture, at least for now, customers and suppliers are likely left scrambling for the next best player to replace the supply link. That’s why you saw Arm NASDAQ: ARM stocks have doubled recently as investors bet markets would find a safe place in stocks to replace Taiwan.

Being a value investor, Dalio wouldn’t just choose Arm stock as his last bet; after all, he’s not likely to view the stock’s 44.2x price-to-sales multiple as if he still has much upside left.

So if he felt comfortable enough to increase his stake in Applied Materials up to 152.5% as of February 15, then you should think about at least a little curiosity about whether it’s too late to the party or whether even you could take advantage of the next advantage.

Well, you won’t have to wonder anymore because MarketBeat has done its homework to give you all the reasons why you can still indulge in this game today. Analysts at The Goldman Sachs Group NYSE:GS they said they expect a recovery in the manufacturing sector in the United States

Unless they are still operating on the technology of the industrial revolution, today’s factories need a lot of chips to ensure this success. You can read this opinion in Goldman’s 2024 Macroeconomic Outlook report here.

What’s the outlook?

In the last month alone, the VanEck Semiconductor ETF NASDAQ: SMH outperformed the broader S&P 500 index by up to 10.5%; While Arm’s explosion primarily drove that performance, you can expect excessive contagion into other names like Applied Materials.

By the way, Buffett is not the only one who has decided to reduce risks related to Taiwan Semiconductor; Vanguard Group also sold up to 9.2% of its stake on the exact reported dates that Dalio purchased Applied Materials shares. 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 the manufacturing sector (one that could spark new demand for chips), are the same ones who are raising their price target on Applied Materials stock? Left to interpretation, a stock price target of $220.0 now calls for 15.0% upside from today’s prices.

Compared to former chip king Taiwan Semiconductor, analysts now see a price target of just $128.50 per share. This valuation is just 1.2% above the stock’s current trading level, reflecting fair value and little upside left, especially now that big players are abandoning the stock.

Coming back to valuation, the semiconductor industry trades at an average P/E ratio of 15.7x today. Remember the saying “It has to be expensive for a reason” when looking at Applied Materials stocks.

At 24.5x, not only is it 56.4% higher than the industry average, but the stock also has a 19.7% premium valuation compared to its competitor, Taiwan Semiconductor, which trades at 20.5x. Now you know the reasons for a market’s willingness to overpay.

Before you consider Taiwan semiconductor manufacturing, you’ll want to hear this.

MarketBeat tracks Wall Street’s highest-rated and best-performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market takes hold… and Taiwan Semiconductor Manufacturing wasn’t on the list.

While Taiwan Semiconductor Manufacturing currently has a “Moderate Buy” rating among analysts, top-rated analysts believe these five stocks are better buys.

View the five stocks here