A Foolish Treat
Applied Materials
By Erik Rydholm (TMF Fletch)
October 24, 2000
Trading at $53 7/16 as of October 23, 2000
On Halloween, we celebrate treats. (Well, most of them, anyway -- legend has it the always disappointing Bit O' Honey was originally manufactured at the outset of the Cold War as a lightweight mortar for use in construction of military field bunkers.) The best treats are motley, pill-shaped, and chewy, scientifically optimized to glom onto teeth like spackle and impregnate them with plaque.
Oh yes, treats are definitely sweet and succulent... until the hellish day they deliver you directly to the dental chair, tears in your eyes, a suction hose dangling from your lifeless lips, the faint smell of burnt enamel tempered by ether wafting from your swollen mouth.
All of this is to preface one lesson as true in the stock market as it is in the candy game: No treat comes without periods of searing pain. And it's a lesson well-heeded if you invest in my treat, Applied Materials (Nasdaq: AMAT).
Applied Materials is the hands-down leader in the manufacturing of wafer fabrication technology. And we're not talking Necco wafers here, folks. We're talking semiconductor wafers that end up installed in just about every gizmo on your desk, in your car, in your kitchen, etc.
You'll never see the Applied Materials brand on any of these machines. It's one of those companies that average consumers never come across in the course of their daily life. In some ways, you can think of this company as the Cisco (Nasdaq: CSCO) of the semiconductor industry -- invisible, but essential. Of course, these ain't no little routers that Applied Materials builds. To get an image of their flagship product, just think of a one-hour photo machine the size of a Chevy Suburban.
They need to be big. The road to the future passes through these machines. Tomorrow's technology depends on smaller, faster chips. Those chips are produced by these machines. Without the machines, no chips. Without the chips, no gizmos. Though Applied Materials doesn't build chips itself (instead, selling its machines to those who do), it is inextricably tied to the health of the overall semiconductor market.
The semiconductor market's health is a bit like Bob Dylan's -- long periods of productivity occasionally interrupted by sudden, spastic shakes of the death rattle. Many an analyst has scuttled his career upon the shoals of a semiconductor market spin cycle. You don't see these downturns until they're upon you. Don't own this stock if you're afraid of the dark.
That said, unlike some of the dicey, thin-margin chipmakers, Applied Materials has the legs to ride out the downturns. It's an outstanding company by almost any measure -- revenues ($5.1 billion), profits (20+% net margins), market cap ($44 billion), management (CEO James Morgan has run the place since 1977). Now, I'm more of a decide-it-yourself than a do-it-yourself investor, so you're not going to get much deep analysis out of me here. For a more in-depth look at the qualitative and quantitative underbelly of the company, mlc11 has put together a 15-point Fischer analysis on the discussion boards.
Applied Materials has run into some choppy waters lately, getting downgraded by a few firms who believe the whole sector might be cycling south. If you dislike volatility, stay away from this stock. Anytime there's even a scrap of worry about Intel (Nasdaq: INTC) or Micron Technology (NYSE: MU), this stock gets hit. There's also this mysterious little matter of a Department of Justice investigation. The company disclosed the probe a few weeks back, but offered few details other than the fact that it revolved around the licensing of intellectual property, including patents.
I've held Applied Materials in my own portfolio for two and a half years since I wrote about it back in an old "Stocks Fools Love" feature. The stock is up more than threefold since then, although it's down about 50% from its high. That's okay. When I think of the future, I have a hard time believing there won't be more gizmos, running on more chips, than we have today.
When the semiconductor cycle breaks south, it gets ugly. We may be at the beginning of the slide. But Applied has the advantage of breaking back early -- as technologies advance, it is ahead of the curve, because, well, no one can use the new technologies until they have the machines that build the new technologies. If you're truly a long-term investor, then I'll be right there with you. But if you're looking to make a quick buck, forget about it.
This treat can trick you.
A Trick or Treat represents the opinion of one Fool and in no way should be taken as the opinion of either the Motley Fool, Inc., the company in question, or representative of anyone or anything other than that specific Fool's thoughts.
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