Applied Materials (AMAT -5.04%) stock put in a solid rally ahead of quarterly earnings, and the report card didn't disappoint. Despite chip industry headwinds, the company hauled in record sales during its fiscal 2022 third quarter (the three months ended July 31) and expects another quarterly sales record in Q4.

While share prices remain depressed (down 33.5% in 2022), this chip industry leader looks like a top buy right now. Here's why.

Record sales, one cheap stock

Applied Materials reported earnings near the top of guidance provided a few months ago. Revenue was a new quarterly record of $6.52 billion, up 5% year over year. Adjusted earnings per share were $1.92, up 2% year over year. Those are pedestrian growth rates but bear in mind that the chip fab equipment industry is dealing with severe supply chain constraints. For the last several quarters, demand has been higher than equipment makers can supply. Some of Applied Materials' peers have reported declines in sales because of these issues.

Despite this imperfect situation, Applied Materials is dealing with these issues and getting machines out the door so that chip manufacturers can expand production and satisfy the world's hunger for more silicon products. As a result, new record quarterly sales are expected in Q4 once again.

At the midpoint of guidance, revenue and adjusted earnings per share are expected to be $6.65 billion and $2, up 9% and 3%, respectively. Again, not blistering growth by any stretch of the imagination. But it's not bad, considering Applied Materials says its backorders will continue increasing for the next few quarters.

Another effect of supply chain problems is that profit margins are dipping. Adjusted operating margin was 30% last quarter, down from 32.7% last year. Nevertheless, this is still a highly profitable company. It returned nearly all its free cash flow to shareholders in Q3 -- $225 million paid out as dividends and another $1 billion in share buybacks. Applied Materials had $2.96 billion in cash and equivalents, $592 million in short-term investments, and $2.05 billion in long-term investments at the end of July, offset by debt of $5.46 billion.

This makes for one cheap microchip stock if you believe the chip industry is poised for years of expansion. Shares trade for just under 18 times enterprise value to free cash flow.

A cyclical slowdown is here but won't last forever

About that long-term outlook for the chip industry: It appears the chip shortage from the last two years is starting to morph into an oversupply of some parts. In particular, there's an oversupply of consumer electronics (PCs, laptops, smartphones), so some chip fabs are delaying the purchases of some fab equipment. In Applied Materials' best estimate, fab equipment spending will wind up being in the mid-$90 billion range, down from the roughly $100 billion to $110 billion expected before.

However, the chip industry has reached a consensus that annual global spending on chips is expected to reach $1 trillion by the end of this decade, up from about $600 billion this year. With so many new chips needed, the cyclical downturn starting to crop up in some industry segments won't last forever. The recent passage of the CHIPS Act to bolster domestic chip production will also eventually kick in to help support this expansion.

But what about Applied Materials? The company's growth trajectory has slowed. However, once Applied Materials catches up on component inventory, it can start fulfilling backorders. Thus, any lost growth this year will likely just be pushed into 2023. Longer term, the intensity of chip fab equipment spending will continue to ramp up as chips become more powerful and plentiful.

Enduring periods of stress makes for a stronger business once those challenges subside. Applied Materials has been working on operational efficiency in response to supply chain issues and the resulting decrease in profit margins. But once supply chain problems ease, those new efficiencies could pay off in a big way as the company begins fulfilling its growing backlog of equipment orders.

This is still a long-term growth story, and Applied Materials has a generous cash-return policy to boost shareholder returns over time. With this chip industry leader still managing to keep financial results moving higher, now looks like the time to buy.