What happened
Shares of semiconductor fabrication equipment company Applied Materials (AMAT +4.26%) fell by 16% in April, according to data provided by S&P Global Market Intelligence. For comparison, the S&P 500 was down 8.8% during the month.
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Supply chain issues, the war in Ukraine, the Federal Reserve hiking interest rates, and a possible slowdown in the chip industry as early as 2023 have conspired to drag Applied Materials and its peers down in recent months. Shares of the chip equipment manufacturer have declined 31% since reaching all-time highs early in 2022.
So what
It's been incredibly rough going for Applied Materials in spite of the company putting up record sales last year. A global shortage of chips -- caused by supply chain issues related to the pandemic, as well as skyrocketing demand throughout all sectors of the economy -- has semiconductor manufacturers laying plans to increase production output for years to come. Additionally, governments around the globe are interested in localizing chip manufacturing and are wooing investment from chip fabs.
All of that bodes well for a company like Applied Materials, which designs and sells the highly specialized and expensive equipment used to make various kinds of chips. In fact, the company's peer Lam Research (LRCX +7.72%) announced earnings in April, showing that long-term demand for its equipment and services remains strong. Supply chain issues weighed on results (revenue grew just 6% year over year, near the bottom of the company's expectations), but Lam nonetheless said it expects significant growth for the chip fab equipment industry this year. Any growth bogged down by supply chain gluts will simply spill over into 2023 and contribute to growth at that point.
Also bogging down Applied and its peers is growing worry that supply for chips could start to catch up with sky-high demand as early as 2023. That possibility has had many chipmakers and designers in retreat. However, given that chip fab facilities take years to plan and construct, Applied Materials is likely to be less cyclical than other parts of the semiconductor industry.
For reference, the global spending on chip fab equipment is expected to be at least $100 billion this year.
Now what
As for Applied Materials, it will likely report earnings sometime in May (an exact date has yet to be announced as of this writing). Management said to expect year-over-year revenue growth of 23% and adjusted earnings-per-share growth of 37% at the midpoint of guidance. Even should the company fall short, it looks to be on a path to deliver another year of solid business expansion.
At 17 times trailing 12-month free cash flow, Applied Materials stock is a great long-term value if you're looking for a broad-based play on the semiconductor industry.
