When Applied Materials, Inc. (Nasdaq: AMAT), the world’s largest semiconductor equipment manufacturer announced plans in 2011 to acquire Varian Semi for more than $4 billion, many industry participants cried foul. After all, AMAT, as the company is known, was already so dominant in the industry that it seemed unfair for it to grow yet larger.

So when AMAT announced in 2014 that it planned to absorb rival Tokyo Electron, for more than $9 billion, competitors pleaded with regulators to nix the deal. Six months later, those regulators indeed expressed serious anti-trust concerns, and AMAT’s management has quietly canceled its proposed merger.

Simply put, with roughly $10 billion in annual revenues, this company is now too large to make any more deals. And that’s a good thing. Management has a new plan, which could fuel 40% upside for this slumping stock. In a moment, I’ll explain the perfect entry point for this stock. One hint: it’s coming very soon.

Go-It-Alone Makes Sense
While management likely wishes the Tokyo Electron deal could have been consummated, not all investors think it made complete sense. Tokyo Electron has seen recent market share losses, and AMAT’s core growth rate would likely have dimmed once the two firms combined forces. Edwin Mok, an analyst at investment bank Needham, recently wrote that the firm is better off without the merger and “is likely to see greater growth trajectory ahead.”

Still, investors hardly greeted that news with applause, as shares moved below $20 for the first time in 2015. Management had promised a wide range of operational synergies in the deal, which obviously now will not happen. And some are concerned that AMAT’s profit margins may come under pressure in the next few quarters, which we are likely to hear more about when fiscal second quarter results are released on Thursday, May 14.

In fact, this imminent earnings release should create an ideal entry point, as analysts increasingly suspect that AMAT will issue soft near-term guidance. Recent industry spending cuts signal that the next few quarters will be uninspiring. Moreover, AMAT’s near-term profit margins are bound to be sobering.

#-ad_banner-#Yet the margin headwinds are actually intentional. AMAT has been spending heavily on new product development, which should help open the door to several new chip equipment niches (3-D NAND, multiple patterning, FinFET) later this year. As those new technologies are unveiled, management is expected to pivot to a robust cost reduction plan.

Yet looking into 2016, analysts see a much brighter spending outlook for AMAT’s equipment. That’s why you may want to buy this stock soon after this week’s earnings announcement, as the decks will have been effectively cleared.

Meanwhile, in the face of a soft quarter or two, AMAT intends to buy back roughly $3 billion in stock, equating to more than 10% of the current share count.

Analyst at DA Davidson think that “a combination of cost control, GM (gross margin) improvement and share repurchases will drive meaningful cash generation and earnings expansion over the next few years.” They have a $25 one-year price target and a $30 five-year target.

For analysts at Citigroup, who see shares hitting $27, the share buyback plan is the biggest catalyst for this stock. They note that the company will likely remain focused on buybacks even after the current $3 billion plan is complete. That’s how much money AMAT has in the bank right now, augmented by annual free cash flow approaching $2 billion. These analysts suggest AMAT may also start seek to issue more debt to fuel buybacks, especially now that acquisitions are likely no longer an option for the company. 

Risks To Consider: The semiconductor industry is highly cyclical, and though the current cycle appears to be in in an upward phase, a global economic slowdown would lead to sharp spending cuts among key customers.

Action To Take –> This is an excellent company that has seen its shares move out of favor. Yet management has several arrows in the quiver to boost free cash flow and sharply boost per share profits. The massive buyback comes at just the right time, helping investors to again understand that AMAT’s shares are quite undervalued in the context of cash flow generation.

If everything goes as I suspect, then AMAT could see major upside ahead, which could qualify it for StreetAuthority’s Maximum Profit system. It flags exactly which stocks are about to jump double, even triple digits in the coming days, weeks and months. In fact, academic studies have shown that momentum is one of the only indicators that has consistently outperformed the market. So far, the Maximum Profit system is making a small group of investors a lot of money. The system recently tagged a few more stocks that could do the same. To learn more, click here.