This Manufacturing Company Is a Cash-Generating Machine

If you're worried about cyclicality or want some exposure to chip manufacturing, Applied Materials (AMAT 1.46%) may be a great stock to buy right now. In this Fool Live segment from "Semiconductor Revolution," recorded on Feb. 17, Motley Fool contributors Nicholas Rossolillo and Danny Vena share why investors should consider this highly profitable company. 

Nicholas Rossolillo: Yeah, Applied Materials. This is an interesting one because we think about the semiconductor industry, we've got several pieces of it. You have the design of the semiconductor. You have the actual manufacturing of it. But in-between, you have to have those companies that manufacture the equipment to manufacture semiconductors. So Applied Materials is measured by market cap. They're one of the biggest in the space. They make all sorts of machines and equipment to help chip fabs make semiconductors. Obviously, we can expect they're going to put up some pretty strong growth numbers right now because of the chip shortage. That's absolutely what we saw yesterday on their earnings update. Revenue up 21 percent from a year-ago. Adjusted earnings per share up 36 percent, almost double the free cash flow. That's my favorite go-to metric for profitability. This is just a cash-generating machine. The space has really consolidated down to just a few players like Lam Research is another one. Applied Materials gets mentioned alongside. A few weeks ago, I think we had touched on a company called Axcelis Technologies. They're very, very tiny, they only do like one thing. Applied Materials does lots of stuff. It's a really good proxy for the chip industry overall.

If you're worried about cyclicality or you want a little bit of exposure to chip manufacturing, like what Intel is trying to double-down on right now with the Tower acquisition that Danny talked about earlier, I like Applied Materials a lot more because you're going to get all that exposure in a company that is going to be less cyclical and is really, really highly profitable. Again, going back to that long-term outlook for a decade or more, the CEO on the earnings call yesterday said, "Our outlook for the next decade is very positive. We expect semiconductor in wafer fab equipment to grow significantly faster than the economy with outsized opportunities for Applied Materials." Just again going back to that long-term trend, there's going to be cycles along the way. But the chip industry is a long-term secular growth trend. Applied Materials is a great way to bet on the whole industry, I think, because you don't have to try to pick the winner, they supply all sorts of companies with equipment. So this is a cool company.

Jose Najarro: Danny, any thoughts on Applied? Is it a company you keep an eye out or follow?

Danny Vena: This is not a company that I have followed, but I certainly agree with the sentiment. This is kind of a picks and shovels play. While you're not necessarily investing in the fabricator themselves, you are investing in the supplier to the fabricator. I think that can certainly be a way to hedge your bets rather than having to buy a whole entire basket of semiconductor stocks. Maybe you buy something like Applied Materials where you get exposure to all of the companies that they supply to.