What happened

Shares of semiconductor equipment manufacturer Applied Materials (NASDAQ:AMAT) rose 13.1% during the month of May, according to data from S&P Global Market Intelligence.

Though recessions are typically not a great time for semiconductor stocks, and thus semiconductor equipment stocks, today's pandemic-related recession could be one that actually accelerates digitization, which may serve as a counteracting tailwind to Applied Materials' business. In May, the tailwinds outweighed the headwinds as Applied rose during the month.

A semiconductor manufacturing machine etches material onto a circular wafer.

Image source: Getty Images.

So what

Two big events occurred for Applied Materials in May: The company reported earnings, and leading-edge foundry Taiwan Semiconductor Manufacturing (NYSE:TSM) announced it would be investing in a new chip manufacturing plant in the United States.

In its fiscal second quarter, Applied reported revenue growth of 11.9% and adjusted (non-GAAP) earnings per share of $0.82. That seems pretty impressive in a quarter marred by the COVID-19 outbreak, though Applied's revenue actually missed analyst expectations, while profits were in line.

Still, on the conference call with analysts, management said the revenue shortfall was due to supply constraints, not demand destruction. In fact, management said Applied now has a record backlog for its semiconductor and service businesses combined, and that demand from end customers "remains strong."

However, U.S.-China trade wars are not as good for Applied Materials, and the recent resurgence of U.S.-China tensions has held back Applied's stock. Yet shortly after earnings, Taiwan Semiconductor Manufacturing announced that it would invest in building a $12 billion manufacturing plant in Arizona, with the backing of the U.S. government.

Taiwan Semi is the world's largest foundry and buys lots of Applied Materials machines, so building redundant U.S. capacity due to fears over a dependence on Asia could actually be a boost for Applied's long-term business. Ironically, the fear of a prolonged U.S.-China cold war may actually increase demand for Applied Materials' machines, since there are no close substitutes found in China.

Now what

There's still lots of uncertainty today around Applied Materials' business. These include the COVID-19 pandemic, the U.S.-China trade war, and a pending acquisition of Kokusai Electric Corporation, which still needs the approval of Chinese regulators.

Nevertheless, Applied Materials trades at a very reasonable P/E ratio of just 17.7 times trailing earnings, 14.7 times forward earnings, and pays a very secure dividend of 1.6%. While it's impossible to say where results will go in the near term due to all the uncertainty, over the long term, Applied Materials is very well-positioned amid long-term technology trends, making it look like a solid value today.