Leading semiconductor fab equipment company Applied Materials (AMAT 2.98%) just had another wonderful year. Many of its peers were in decline in 2023 due to a severe downturn in PC and smartphone sales, which rippled through the chip manufacturing supply chain and caused lower sales of equipment used to make chips. But Applied Materials outperformed, reporting a 3% increase in fiscal 2023 revenue, a 9% increase in earnings per share, and a 65% rally in free cash flow that generated $7.6 billion (a free cash flow profit margin of 29%).

However, a Reuters news report about an ongoing U.S. investigation into Applied Materials' shipments of advanced chipmaking equipment to China in 2021 and 2022 stole the headlines. Shares briefly dipped before rallying again toward recent highs, which makes sense, given that Applied's management has already been divulging the presence of an investigation since last autumn.

Nevertheless, while I remain a very happy longtime shareholder of Applied Materials, I'm no longer calling this stock a best buy right now. After doubling in value from lows in October 2022 to the end of November 2023, there's a different reason turbulence could be coming for this top semiconductor equipment company.

A new semiconductor downturn is coming

The PC and smartphone market has been in total disarray since the second half of 2022. After nearly two years of elevated spending on consumer electronics during the pandemic, extra chip supply was finally brought to market, just in time for consumers to pare back their purchasing of computing hardware. The result has been depressed sales for companies that manufacture logic chips, memory chips, and other components used to build electronics.

Applied was able to bridge this gap, though, by pivoting toward end markets that were still very healthy: automotive and other industrial devices. Thanks to its broad portfolio of equipment that can handle all sorts of chipmaking processes, the company was able to grow in 2023, while many of its more PC and smartphone-focused peers reported sales declines from peak sales in 2022.

According to upbeat guidance from the likes of Intel and Advanced Micro Devices, things are now looking up for the large PC market. This should bode well for Applied's equipment geared toward these types of chips. However, after a year of record sales for automotive and industrial chips (everything from medical to factory automation equipment), a cyclical downturn for these markets has now arrived. Manufacturers that address these chip end markets -- everyone from Texas Instruments to ON Semiconductor -- are now reporting lower revenue compared to last year due to the same type of excess chip supply as what struck PCs and smartphones starting in 2022.

The result for Applied? While rallying activity in the PC market should heat up this year, its industrial chip customers appear to be pulling back from those big purchases in 2023. For the first quarter of fiscal 2024, Applied management expects revenue and adjusted earnings per share to decline 4% and 6.5%, respectively, year over year at the midpoint of guidance.

The long-term investment thesis is rock solid, but there are reasons to pause buying

Industrial chipmakers have been indicating this new down cycle could last through the first half of 2024. This could keep some downward pressure on Applied for a couple more quarters.

I'm certainly not suggesting I'm about to part ways with my Applied Materials investment. In fact, the long-term thesis is still very good for this semiconductor manufacturing equipment leader. Though industrial chips are now in a slump, semiconductor demand is still headed much higher through the end of this decade. As a result, industry association SEMI.org recently reported fab equipment sales overall will rebound in 2024 -- perhaps most notably in the second half of the year as dozens of new manufacturing facilities open up.

By 2026, fab equipment is expected to far surpass the previous peak spending in 2022, again driven by dozens of new fab construction projects currently underway to meet long-term demand for computing infrastructure.

Thus, I'm merely holding off buying any more Applied stock until some current storm clouds clear up a bit. Applied Materials has been a stellar growth and income stock over the long term, notching a total return (which includes reinvested dividends) of nearly 900% over the last decade. Keep this company on your radar for later in 2024, as a better buying opportunity may be coming.