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Applied Materials: New Normal

Sep. 05, 2018 6:43 PM ETApplied Materials, Inc. (AMAT)86 Comments


  • Applied Materials continues to support a new normal in the WFE segment as the AI and big data era starts.
  • The company is more balanced now to handle shifts in particular semiconductor equipment segments.
  • The net payout yield reaches 13% in a signal to buy the stock similar to below $20 back in 2016.

As the stock soared to new heights, Applied Materials (NASDAQ:AMAT) always was going to eventually face the past cyclical nature of the semiconductor equipment industry. The market wasn’t going to pay extreme prices for peak earnings, if the cyclical top was around the corner. The current yields suggest the “new normal” is a legitimate possibility suggesting the dip to $42 provides an opportunity.

Image Source: Applied Materials website

New Normal

The semiconductor equipment sector has clearly reached a short-term peak. While other cycle tops were followed by massive sales dips, Applied Materials suggests otherwise with targets for this year above the 2017 peak. Wafer fab equipment industry sales are forecast to again top $50 billion and hit a record while the company further boosts EPS this year.

The industry is more diverse now with particular segments taking hits while others expand to remove the overall cyclical nature of the sector. The company suggests that the market is evolving from the mobile and social media era to one where AI and big data will further drive semiconductor sales to new heights. Investors that originally thought the PC and Internet era was the peak back around 2010 missed out on a large rally in the last few years.

Source: Applied Materials website

In respect to AMAT, anybody focused on the foundry sector would’ve seen a massive hit. AMAT saw sales into this equipment market dip by 22% while overall sales hit record levels due to a similar pickup in the DRAM segment.

Source: AMAT Q2'18 earnings release

The offsets from the services sector was the saving grace last quarter with related sales up 15% to $954 million.

FY20 Targets

One key point to FY20 targets is that AMAT doesn’t expect much in the way of growth over the next couple of years. FY20

This article was written by

Stone Fox Capital profile picture

Stone Fox Capital (aka Mark Holder) is a CPA with degrees in Accounting and Finance. He is also Series 65 licensed and has 30 years of investing experience, including 10 years as a portfolio manager.

Mark leads the investing group Out Fox The Street where he shares stock picks and deep research to help readers uncover potential multibaggers while managing portfolio risk via diversification. Features include various model portfolios, stock picks with identifiable catalysts, daily updates, real-time alerts, and access to community chat and direct chat with Mark for questions. Learn more.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in AMAT over the next 72 hours. 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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Comments (86)

Stone Fox Capital profile picture
My lack of confidence in the 'new normal' is looking smarter and smarter and the management is looking dump to have spent so much on stock buybacks in the last year... smh
great time to pick this one up. amat is solid imo
Stone Fox Capital profile picture
Not turning out to have been such a good time to buy. Down to $32 in after hours.
agreed.. i think will have to wait by the 1st qtr to see what is happening.. to add , hard to time these things for sure
CFRA 12 Mo target Price 53.00 FMV=53.45 included in their 9/1/18 Report.
Stone Fox Capital profile picture
@Bruce Bohannon
that target is looking so good with the guidance cut as the semi equip sector provoes to be cyclical yet again.
EliasMouawad profile picture
@Stone Fox Capital Interesting. When do you expect the cycle to turn up again ? In January 2019 ?
Stone Fox Capital profile picture
Didn't $AMAT say the 2H19? The stocks will turn before that.
The secular thesis for semi conductor manufacturing is intact. Cyclicality is well known. So is the reliable behavior of the market resulting in excesses in both direction. AMAT is a classic reflection of behavioral investing. The smarts for the longer term will buy while the fearful run for cover.
You don’t have to be as wise, smart or rich as Buffett to buy a few hundred shares.
Morning Star fair value is $59.00 . Other estimates are higher,
EliasMouawad profile picture
@bkayoc Exactly...it's a matter of time before you win. Short sellers win only in the short term.
If you buy in the low 40's or lower you will be very happy if you get it cheaper you will be even happier. Just have to have patience.
EliasMouawad profile picture
@shaz1001 Right...it's a screaming buy, as clear as sunlight
@EliasMouawad We agree and the both of us will be happy we bought now down road. no doubt!
I opened a 9/14 obligation @ 39. Will enjoy the $ either way. Unable to predict the future!
Went long with teaser shares too. Now a proud owner. Trades x Div 11/21/18 - looks like there is plenty of time to acquire more shares if they don't run away. Thanks for the article and comments.

Guess I should locate / study the presentation to/at Citi
this is classic buffett rule: Be greedy when others are fearful.

I'm a buyer anywhere around 37. this is an easy 25 percent period.
Stone Fox Capital profile picture
Guess so, but still surprised that very few people seem to acknowledge the cyclical nature of the sector. Buying the tip isn't the best way to make money. Buying the trough is...
Got in at 49, got out at 43.5 after ER, this is a long game and when market is booming and cloud stocks up 1% daily on average nobody got time for this sector.
Stone Fox Capital profile picture
so can't fight sector rotation.

Thats why I am not a trader the MM's will manipulate like no other. I first bought at 43 and bought some more at 41 and change. Now we are in the 30's and if we stay there when i get some more powder I will buy more. My time horizon is 3-5 years and I think AMAT will be much higher at that time so adding at these levels no brainer for me. Others may disagree but hey its my cash to make or lose.
Just don't swing? Not attempting to be argumentative however. Life is good and thanks for your work and comments.
Stone Fox Capital profile picture
Good catch! Yes, downside protection.
EliasMouawad profile picture
@Stone Fox Capital "the large share repurchases provide downside risk to investors buying the stock at these levels."
Do you mean downside protection ??
May initiate a short obligation for a strike below the 52 week low. Maybe too hard for me to understand this business too and I'll wait for the real sale.

I dislike when MGMT buys shares at much higher prices than the Business is selling for at present day prices. Invert: May be a good sign.
Bruce Bohannan- true, but that's what they were screaming at BA for with the huge buybacks in the $160's, $180's, and $2xx's.
Stone Fox Capital profile picture
@Bruce Bohannon
Only dislike buybacks at higher prices, if the company stops the buybacks. Stocks fall for various reasons, its the companies unprepared for the dips that are the problem.

$BA was a screaming buy in the $120s when it was buying like crazy. The buybacks haven't kept up with the stock gains similar to $AMAT when it hit $40.
Low Pe and financially made of granite! I like AMAT long term. You certainly can do far worse.
diroha profile picture
I agree with your analysis. The new normal makes sense and in addition the consolidation of the industry and the increasingly complicated nature of semi fabrication bodes well for the market leaders.
Cramer said buy because it is now a secular growth story. I guess he was right for a few months (sarcasm intended).

Unfortunately, it seems that there are a number of good companies on sale, including all Chinese companies and many doing business in China.
Stone Fox Capital profile picture
@MJ Pragmatist
Very true.... $BIDU, $FCX to name a couple of great bargains.
The Golden Orb profile picture
As a new AMAT investor I hope it keeps its' head above water....someone check for cinder blocks on the feet....
You buy good companies when they are on sale, and right now AMAT is on sale. Hope it treads water for awhile so i can continue to add to my position.
Stone Fox Capital profile picture
$AMAT is only on sale, if the semi market is no longer cyclical. So you would vote this is a trough, not a peak?
Stone Fox, read AMAT's presentation at City's. Will get answers to your 'ifs'.
Stone Fox Capital profile picture
Is it any different than the last earnings call? $AMAT isn't always right. The market doesn't agree with them or the stock wouldn't be at $42.
Teutonic Knight profile picture
AMAT, simply put is now out of favor due to poor sentiment

Getting poorer and poorer though

It is called the beating of the drowning dog
Beaten down way too much
Semicon and “large cap” are NOT “sectors”.
Stone Fox Capital profile picture
Both are sectors of the stock market. jeez
$1.00/share div May 2019. C'mon AMAT!
Stone Fox Capital profile picture
An annual divy of $1 is doable, but why is that important?
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