A lot has changed since Applied Materials (AMAT +1.81%) kicked off its 2020 fiscal year with a rebound in sales after a U.S.-China trade war and memory chip market slump the year prior. This time around, it's COVID-19 that is proving to be a headwind for the company. Though shelter-in-place and work-from-home orders are causing a temporary spike in use of digital tools, supply chain issues have cropped up and the longer-term health of the global economy remains uncertain.
As for Applied, though, its business is on solid footing, and trends favoring its tech manufacturing services remain intact. In spite of question marks, shares are an even better value now than a few months ago after the company turned in another quarter of solid growth.
A value on chip manufacturing
It's important to bear in mind that, as a supplier of equipment and services to semiconductor manufacturers, Applied's fortunes ebb and flow with the cycles inherent with any industrial company. Supply and demand isn't as stable as the service and subscription-based business models that have arisen in the tech world in recent years.
Revenue has trended higher over the years, though, and Applied has averaged a good return on its investments into new manufacturing processes and equipment for its customers.
Data by YCharts.
At this particular juncture, some notable areas Applied is betting on are a rebound in digital memory (one of the more volatile segments of the chip industry), continued growth of its recurring services segment, ultra-high-definition OLED displays, and solar energy, to name just a few. Fiscal 2020 second-quarter (the three months ended April 26, 2020) revenue increased 12% from a year ago to $3.96 billion, and adjusted earnings per share rallied 27% as the company's end-markets rebounded from a slow 2019. Supply chain disruption reduced sales by $650 million, but management said it expects to recoup that amount during the next two quarters.
Even with some headwinds cropping up, Applied is getting a boost from the surge in digital use during the coronavirus crisis. However, should events turn against the company, it's in good financial shape. The company finished April 2020 with $7.38 billion in cash and investments and $6.82 billion in debt. Shares trade for 17.8 times trailing 12-month adjusted earnings as of this writing. While management didn't provide specific numbers due to how fluid the situation currently is, the stock could be a value based on the current view that revenue for all three business segments -- semiconductor systems, Applied global services, and display and adjacent markets -- are expected to rise sequentially for the rest of fiscal 2020.
|
Applied Materials Business Segment |
First Half Fiscal 2020 |
YOY Change |
|---|---|---|
|
Revenue |
$8.12 billion |
11% |
|
Adjusted operating income |
$2.04 billion |
19% |
|
Adjusted earnings per share |
$1.86 million |
24% |
Data source: Applied Materials. YOY = year over year.
The migration to digital is still intact
While business is resilient for now, it is longer-term performance that makes a great investment. Applied has long been a bet on the migration to digital systems, and though we're still in the midst of the coronavirus crisis and an economic recovery is pending, it would appear that the move to digital systems will be accelerating. Organizations are looking to put business continuity plans in place, and automation of systems is getting a shot in the arm due to the current disruption COVID-19 has caused.
Image source: Getty Images.
However, putting new systems in place requires advances in power consumption, computing performance, and speed of delivery of new tech. That's where Applied comes in. Increases in data center usage and the cloud computing services they support, e-commerce, AI-enhanced operations, data analytics, and higher-definition screens have been the technologies behind the company's growth in the last decade, and COVID-19 only appears to be solidifying those tailwinds for the next decade ahead.
Applied Materials stock will nonetheless be a volatile stock as the manufacturing cycle can fluctuate wildly depending on changes in global supply and demand. But the long-term trend favoring the company is intact, and a dividend that currently yields 1.7% and an ongoing share repurchase program (which boosts earnings per share) help sweeten the deal along the way. Applied shares look like a buy right now as the dust begins to settle from the current crisis.
