Is the Growth Cycle for Applied Materials Here to Stay?

Applied Materials (AMAT) is the largest supplier of manufacturing equipment, services, and software for semiconductors and displays. The semiconductor boom seen in 2016 and 2017 sent the stock up 75.0% and 60.0%, respectively, as the company reported strong double-digit revenue growth during this period.

However, the stock market sell-off in March over fears of a potential trade war between the US and China (FXI) sent AMAT stock down to $55.40 on March 23 from its 52-week high of $62.40 on March 12. AMAT earns 22.0% of its revenues from China.

While investors were already cautious in the shadow of a potential trade war, rival Lam Research (LRCX) posted guidance of a slight sequential decline in shipments for the June 2018 quarter. This raised fears among investors that the semiconductor upcycle is coming to an end, sending the iShares PHLX Semiconductor ETF (SOXX) down 5.3% over the next two days.

Since then, strong guidance by Intel and Texas Instruments has failed to bring LRCX stock back to its April 17 levels. Investors are watching AMAT, which is set to report its fiscal 2Q18[1. fiscal 2Q18 ended April 28] earnings on May 17.

Investors are reacting to the noise of a potential trade war, which could hurt economic growth. Is this the end of AMAT’s growth cycle? To understand this topic, let’s look at the company’s business dynamics.

Applied Materials (AMAT) supplies manufacturing equipment and services to chipmakers, which manufacture semiconductors for various applications. AMAT earns revenues when chipmakers spend capital to buy equipment and services to expand production capacity or transition to advanced technology.

Two dynamics are working well for AMAT, the first of which is industry dynamics. The customer base of the semiconductor industry has broadened as the world moves toward IoT (Internet of Things), big data, and AI (artificial intelligence). Sectors such as retail, entertainment, healthcare, and transportation are using data and electronic devices to perform a variety of tasks. This dynamic is reducing the cyclicality of the semiconductor industry and increases the demand for increasingly innovative chips.

Business dynamics also benefited AMAT. The company is investing in differentiated products, and it’s using its broad portfolio to bring new technologies to its clients at a faster rate than its rivals.

While industry and business dynamics appear to favor AMAT, the company is exposed to uncertainty surrounding the global economy and continuous changes in the semiconductor industry. So, the trade tension between the US and China has made AMAT more volatile. We’ll look into this topic next.

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