In this recession, most cyclical stocks -- or those that are highly sensitive to the health of the overall economy -- have been hit hard. That's not surprising; the COVID-19 pandemic is causing a good chunk of the economy, especially those in travel and leisure sector, to essentially close down. Though unemployment is improving, it's still above 10%, which is still a very large number.

But this is also a strange recession; after all, with people stuck at home, getting government stimulus checks, and saving money from travel and restaurants, it's actually leading to a boom in the stay-at-home economy, with surging stock prices for the companies that cater to this more digital, stay-at-home world.

That's also filtering down to much of the technology that powers that world. Although semiconductors and semiconductor equipment stocks are usually very cyclical, recent results from Applied Materials (AMAT 6.28%) last week shows the semiconductor manufacturing sector is actually in the midst of a counterintuitive boom.

A semiconductor machine deposits material on a circular wafer.

Image source: Getty Images.

A blowout quarter and strong guidance

Applied's fiscal third quarter ends not at the end of June, but rather the end of July, showing even more recent results than other companies that have been reporting results recently. During the quarter, revenue surged 23% year over year and 11% quarter over quarter, and earnings per share followed 43.2% higher year-over-year and 19.1% quarter-over-quarter. Both top and bottom lines handily beat expectations.

But the good news didn't stop there; Applied guided to even more sequential growth next quarter. Management expects $4.6 billion in revenue, plus or minus $0.2 billion, or 4.5% sequential growth, and $1.17 in EPS, plus or minus $0.06, or 10.4% sequential growth next quarter. And if that weren't enough, management also forecasts continued strength into 2021 as well.

How Applied is defying gravity

It is certainly a bit surprising to see such strong results in semiconductor equipment spending while the economy is in recession. However, there appears to be several factors all moving in Applied Materials' direction.

First, the stay-at-home economy is putting a premium on leading technology devices and data centers, which is putting a floor on the semiconductor market, even though certain products like auto and consumer devices are down. Second, technology spend from companies on artificial intelligence and automation is more critical than ever, with Applied Materials' management saying that much of this spending on these future technologies is now "non-discretionary."

There's also a lot of competition in the market among Applied Materials' customers, across both foundries and even between countries. Many other foundries are ramping up spending in an effort to catch up to Taiwan Semiconductor Manufacturing (TSM 2.16%), and the United States just passed a bill to subsidize semiconductor production within U.S. borders, as it looks to match China's efforts to grow its own semiconductor industry. All of that competition to reach the leading edge means more customers investing heavily in semiconductor manufacturing equipment. CFO Dan Durn said on the conference call with analysts, "We see a diversification of spend under way in the market. We see multiple customers ramping multiple nodes with the strong pull for the technology and innovation that we're bringing to market." 

Finally, Applied Materials noted that it's also gaining market share within these positive industry segments. On the call, management touted that it had gained eight points of market share in deposition, while also being the fastest-growing company in etch equipment, as well as in metrology.

After post-earnings gains, Applied materials still looks cheap

Applied Materials' stock gained after the very positive earnings release, the stock still appears rather cheap, trading at just under 20 times trailing earnings and 15 times forward earnings. While the lumpiness of semi equipment sales may be holding back valuation, consider that Applied Materials has a great balance sheet, with more cash than debt, very high profitability, and its recurring-revenue service segment is about 23.5% of revenue.

As semiconductor manufacturing becomes more complex and customized, Applied should remain a long-term growth company, with some fluctuations along the way. Given the high valuations of other leading tech stocks, Applied still looks like a solid value play in tech, even after its recent run.