Is Applied Materials A Good Stock To Buy?

Is Applied Materials A Good Stock To Buy? Between mobile devices and cloud-managed data storage and software delivery, the transition to a wholly digital environment feels nearly complete. However, by most accounts, today’s technology only scratches the surface of what is possible.

The Internet of Things (IoT) is expanding, and all sorts of everyday objects can already be connected through the cloud. Soon, appliances, homes, and offices that can’t be controlled online will be the exception rather than the rule. 

Meanwhile, 5G is rolling out steadily. Once it is universally available, previously unimagined technology will become an integral part of daily life. Smart cities, self-driving cars, artificial intelligence, and virtual/augmented reality will be layered into commonplace products and services. 

All of that technology relies on the computer chips produced by semiconductor companies, and the competition among industry leaders is fierce.

One of the top chip producers, Skyworks Solutions (SWKS), is showing itself to be the biggest winner in the 5G space, while GPU specialist Nvidia is pulling ahead in graphics processing.

Others are focused on artificial intelligence, machine learning, and a variety of additional technologies that will eventually redefine the human experience. 

As industry analysts debate the best semiconductor stocks, smart investors are taking a different approach. Instead of guessing which semiconductor company will be most successful, they are looking at the enterprises that supply materials to build semiconductors. That’s where Applied Materials comes in.

The question isn’t which semiconductor company is best, but instead, is Applied Materials a good stock to buy?

Applied Materials Makes Semiconductors Possible

At the most basic level, Applied Materials builds the equipment that semiconductor companies use to manufacture their chips, and it is deeply involved in the three biggest near-term technological advances.

These include Artificial Intelligence (AI) and machine learning, 5G wireless networks, and the Internet of Things (IoT). While semiconductor companies focus on making faster, more reliable chips in one or two of these areas, Applied Materials benefits from growth in all three. 

Semiconductor companies are experiencing high demand on a near-constant basis, and many are answering that demand by building out their fabrication facilities. As they expand, they need more equipment, and Applied Materials stands ready to supply it. 

At the same time, the need for massive amounts of memory to operate 5G-enabled devices is going up at virtually a 90-degree angle, and many device manufacturers can’t keep up.

They, too, rely on Applied Materials to produce the components necessary to make their products. That sort of demand puts Applied Materials in the right place at the right time to grow revenues at a never-before-seen rate.

Is Applied Materials Stock A Good Buy?

Applied Materials has been all-but-immune to the economic havoc caused by the COVID-19 pandemic. Aside from a few blips due to plant closures in the industrial and automotive sectors, Applied Materials fired on all cylinders throughout 2020. 

For the most recent quarter, management reported revenue increases of 25 percent year-over-year to a total of $4.69 billion.

When considered from a non-GAAP perspective, earnings went up by 56 percent over the prior year period to total $1.25 per share. 

The most recent quarter marked the end of Applied Materials’ fiscal 2020, so business leaders reported year-end results, as well.

Full-year revenue grew 18 percent year-over-year to $17.2 billion, and guidance for the next quarter looks even better.

Management projected a 19 percent increase in revenue or $4.95 billion year-over-year for the fiscal first quarter of 2021. Adjusted earnings per share are expected in at roughly $1.26 per share, or a 30 percent increase as compared to fiscal first quarter 2020. 

These projections are based on the fact that Applied Materials’ semiconductor clients are scrambling to keep up with demand.

Among other things, they are planning expansion of their fabrication facilities, which means revenue for Applied Materials.

In addition, automotive and industrial clients are expecting greater stability and reliable output in the coming year as COVID-19 is brought under control. That, too, contributes to steady growth in Applied Materials’ top-line results. 

Industry analysts expect increases of up to 11 percent in spending on semiconductor equipment. Given Applied Materials’ leadership position in this area of the industry, that can only mean good things for investors. In other words, Applied Materials stock is a buy.

What Could Derail Applied Materials Stock?

While the consensus is that demand for semiconductors can only go up and therefore related equipment will follow, there are risks to buying Applied Materials stock. The biggest includes potential obstacles and unexpected expenses due to developments in the geopolitical environment. 

For the moment, it appears that a new administration in the White House will deescalate trade-related tension with China. If that doesn’t go as expected, every element of the semiconductor industry will feel some pain. 

It also seems that Congress will remain divided, with the House of Representatives under control of the Democrats and the Republicans retaining their Senate majority. That benefits Applied Materials, as such a Congress is unlikely to pass costly new tax legislation.

If control of the Senate changes or Congress negotiates an increase in corporate taxes, Applied Materials could see a substantial impact to bottom-line results. 

Applied Materials Side-Steps Stiff Semi Competition 

The beauty of investing in Applied Materials is that it doesn’t get caught up in the heavy competition of the semiconductor industry.

Applied Materials isn’t endlessly trying to win contracts based on the speed of its graphics and the pressure to develop faster, more accurate, more reliable chips. Instead, it is creating best-in-class fabrication equipment for other companies to do the work of chip development and manufacturing. 

Certainly, there is competition in Applied Materials’ segment of the industry, but it’s much lighter. The company’s main rivals are Lam Research and ASML Holdings.

However, neither presents a formidable threat to Applied Materials. That is primarily due to the fact that demand for these products and services is so high, there is plenty of business to go around. 

Barriers to entry are nearly insurmountable for startups, and Applied Materials, Lam, and ASML are leaps and bounds ahead of most fabrication equipment hopefuls. As a result, it is unlikely that new companies with greater growth potential will pop up to compete in this industry.

Further, Applied Materials is widely projected to be the biggest winner in 5G-related growth, making it the best choice among semiconductor equipment manufacturing stocks.

Is Applied Materials A Good Stock To Buy? 

The bottom line is that Applied Materials is a good stock to buy. It offers the benefits associated with semiconductor stocks, such as rapid growth, without the heavy competition.

Demand for computer chips is skyrocketing, and there is no end in sight. That means Applied Materials will be a key player in the technology of tomorrow. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.