What happened
Shares of Applied Materials (AMAT 2.98%) rose 48.4% in the first half of 2023, according to data from S&P Global Market Intelligence.
It was a very good first half for semiconductor stocks in general, as many sector leaders entered 2023 at depressed levels following the Fed's aggressive interest rate hikes and fears over a potential recession.
Yet while PC and smartphone sales have remained depressed following the pull-forward of demand during the pandemic and weakness in China, trailing-edge chips for electric vehicles and the Internet of Things applications remained strong.
Then in May, blockbuster guidance from Nvidia lit a fire under any chip stock involved in the AI ecosystem. Additionally, the long-feared recession anticipated since last year has thus far failed to materialize.
As the largest (by revenue) and most diverse semiconductor equipment stock, Applied Materials benefited strongly from its exposure to both trailing-edge nodes in the first half of the year as well as AI enthusiasm over the past two months.
So what
In its two earnings reports during the first half of the year, Applied Materials beat analyst expectations on both revenue and earnings per share (EPS), even though growth flatlined. While its fiscal first and second quarters displayed year-over-year growth of 7.5% and 6.2%, respectively, each quarter actually showed small sequential declines.
Still, it had been known coming into the year that the memory industry was in its worst downturn since the 2008 financial crisis, which would inevitably lead to sharp declines in investment. Meanwhile, the advanced logic sector is also set for year-over-year declines in 2023 amid depressed demand for PCs, smartphones, and non-AI servers. On top of these headwinds, new restrictions on advanced equipment sales to China implemented last October were set to additionally harm growth.
So, Applied entered the year with a depressed price-to-earnings (P/E) ratio around 13, setting it up well for any positive surprises.
Those surprises came in the form of outperformance in Applied's trailing-edge equipment sales, notably for ion implantation, which actually accelerated even as leading-edge logic and memory-equipment sales declined. The surprising strength was due to Applied having the broadest product portfolio in the semicap equipment industry, insuring a diversity of revenue streams.
Applied's portfolio of course also touches artificial intelligence chips, so Applied got an additional boost following Nvidia's late-May guidance. For leading-edge chips, Applied's core etch and deposition equipment will be a key in the current transition from FinFETs to gate-all-around transistors on upcoming semiconductor nodes.
Applied's diversity and relatively smoother cyclicality than rivals' also allow it to invest in advanced research and development projects. In May, Applied announced the new $4 billion EPIC research and development (R&D) center. EPIC will be a first-of-its-kind center for collaboration among Applied, its logic and memory customers, and leading universities, with the aim of accelerating chip innovation in the years ahead.
In addition to cutting-edge R&D, Applied's diversity also allows for relatively consistent profits, even in the current down cycle. The bullish profit outlook allowed Applied to raise its dividend 23.1% in March. In addition, management announced it intends to double that dividend over the next few years, along with a $10 billion share-repurchase program.
AMAT Total Return Level data by YCharts.
Now what
It was a great first half for Applied, but of course, this came after the stock's 38.1% decline in 2022. In that light, 2023's outperformance seems like a mere recovery from a particularly bad year.
While the semiconductor sector is notoriously cyclical and volatile, if an investor can stomach its cycles, the long-term picture looks attractive. Over the past 10 years, Applied is up nearly 900% with dividends included, compared to a mere 223% gain for the S&P 500. Even today, Applied trades at a very reasonable 17.7 times-earnings multiple, still well below the market's multiple of 25.6.
