Back in the day I avoided writing about Applied Materials (NASDAQ:AMAT) because a relative worked there, and since his retirement several years ago I have been remiss.
AMAT doesn't make chips. It makes the machines that make chips. Early in the century the company tried to break free of that niche by producing machines that also could make solar panels - photovoltaics are a similar technology - but it's the chips that are the money, thanks to Moore's Second Law, which holds that as chips get more complicated, so must the machines that make them.
Applied results are built around one customer, Intel (NASDAQ:INTC). Chipzilla, as it is sometimes called, remains at half the levels it held during the height of the dot-com boom, and has evolved over time into a yield stock, a 26 cent/share dividend yielding 3.63% at current prices. But it may be on the verge of one of its periodic break-outs, and the reason isn't just rumors that its chips could finally get into the Apple (NASDAQ:AAPL) iPhone.
Instead, the correct answer lies at Applied and its second quarter performance, as well as its expectations going forward. Earnings came in at $320 million, 29 cents per share, on revenue of $2.45 billion. But what jumped out was the new orders, up 37% to $3.45 billion. That's what we call "runway," an assurance of profit down the road - the company's margins are typically in the mid-to-high teens.
OLED displays, which use light-emitting diodes to deliver crisp images, were given credit by management for the improvement. The rumors surrounding Intel, meanwhile, currently only involve a modem chip. I think it very possible that Intel is going to be embedded far more deeply in the new iPhone than that, possibly supplying displays so that Apple can get away from its long reliance on Samsung (OTC:SSNLF) and other Asian-based suppliers for parts. (Costs are no longer an issue - Applied machines can be installed in China as easily as the U.S., and be deployed there by a U.S.-based company.)
Since that Y2K peak, Applied and Intel have mainly moved in lockstep with one another, but since October it has been AMAT that has been the star, up over 20% even before the latest earnings release. It's my guess that Intel is about to play catch-up, and that its next earnings report, now expected on July 20, may contain some pleasant surprises.
Unless Applied has suddenly freed itself from Intel completely, Chipzilla is the bet.
Disclosure: I am/we are long INTC, AAPL.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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