Applied Materials (AMAT -2.37%) is the largest semiconductor equipment manufacturer by revenue. Its products are used in the manufacturing of semiconductors, including logic, DRAM memory, NAND flash storage, and displays.

Applied Materials has been hurt by a semi-downturn that has been going on since the middle of last year, causing many customers -- especially in memory -- to delay purchases of equipment.

That caused Applied's revenue to fall 22.7% in the recently reported quarter, with adjusted net income down by an even greater 47%. Applied also guided to fairly flat revenue and adjusted EPS for the current quarter, though with a wide range. And yet these seemingly bad numbers spurred a 6% rally in after-hours trading.

So why did the market take these seemingly terrible results so well?

A worker in a white safety clothing holds up a semiconductor chip.

Image source: Getty Images.

All about expectations

Though Applied's operating results fell, they did come in ahead of expectations. Revenue of $3.54 billion topped analyst estimates by about $60 million, and non-GAAP (generally accepted accounting principles) EPS of $0.70 beat expectations of $0.65.

One reason for the earnings beat could be the company's services segment, which accounted for about 28% of revenues. That segment, which supplies spare parts and services older equipment in its installed base, grew 4.1% year over year. Part of the services segment is subscription-based, so it is more of a recurring stream than equipment sales. In contrast, equipment sales fell 24.7% year over year.

Investors may have grown to appreciate the resilience of the company's services segment, which can act as a stabilizing force during periods of soft equipment sales. Like Applied, other semi equipment companies have reported growth in services, even if equipment sales have lagged. CEO Gary Dickerson sees the services segment growing in the high single digits for the full year, even in a down cycle for equipment spending.

All about the cycle

Investors may have come to the conclusion that the current quarter is the low point of the cycle. Though management guided to flat sequential performance, it remains bullish over the long term, past what's shaping up to be a soft 2019.

Specifically, CEO Gary Dickerson indicated that the advent of artificial intelligence, 5G networks, and cloud computing are powerful trends that should bolster semiconductor demand over the next decade: "Major new industry growth drivers are emerging in the form of IoT, next-generation communications, big data and artificial intelligence. These technologies are disruptive and transformative, and will touch almost every area of the economy and our lives."

All of these applications need advanced semiconductor chips, which means more and more of Applied's equipment.

For 2019, Dickerson sees the current down cycle in NAND bottoming out, with prices stabilizing and inventory coming down, while the DRAM bottoming cycle is not quite as far along. This adds up to a year in which Dickerson still expects wafer fabrication equipment to be down in the mid-to-high teens.

So why might the market have taken this as a positive? Well, in the recent quarter, Applied's equipment was down almost 25%, so the mid-to-high-teens guidance for the full year implies some growth and improvement in the back half.

Buybacks and dividends

Expressing confidence in Applied's future, management returned $814 million to shareholders in the quarter, with $625 million in repurchases and $189 million in dividends. The company even announced a 5% dividend increase during the call, increasing the quarterly payout from $0.20 to $0.21 in spite of the down cycle.

Time to buy?

I don't think Applied's results are going to dramatically improve this year, though the longer-term vision appears compelling. Assuming this quarter's earnings per share are the bottom of the cycle (a big if), Applied's annualized EPS from last quarter would come to about $2.80. At today's stock price of roughly $44, that's about a 15.7 price-to-earnings multiple. 2018's record high of $3.23 amounts to a 13.6 P/E ratio.

Now, Applied Materials did earn as little as $1.54 per share as recently as 2016. But if Dickerson's thesis is to be believed, the end markets for advanced semiconductors are growing and diversifying, which should lead to higher crests and higher troughs each cycle. Should that be the case, a low-to-mid-teens multiple seems like an attractive price for this secular growth story. Though owning cyclical stocks like these can bring ups and downs, Applied's stock does seem like a good value here.