Last night, the world's leading maker of semiconductor manufacturing equipment reported results that beat Wall Street estimates. Revenue more than doubled and adjusted per-share earnings rose to $0.17 from a two-cent loss in last year's fiscal third quarter.
Despite this growth, Applied Materials entered today trading for nine times the average fiscal 2011 earnings estimate of $1.26 a share, according to data supplied by Capital IQ, a division of Standard & Poor's. The only way that's a fair multiple is if Applied's Q3 growth is an anomaly. I don't believe it is.
The dark side of a sunny stock
Skeptics will tell you that a booming chip recovery accounts for the gains, yet the majority of chip designers don't operate a manufacturing facility. Intel
Bears can also point to the sun as a problem for Applied. The company is struggling to find a sustainable niche as a supplier of solar manufacturing equipment even as photovoltaic cell makers such as SunPower
Yes, chips do dip, but not forever
As bad as the drop in solar sales sounds, it's Foolish to remember that Applied's core business is semiconductor manufacturing, not solar manufacturing, and every day brings more news of intelligence being built into common devices. Phones and TVs are acting like computers, even as computers are being reduced to the size of a notepad. None of this is possible without advanced chips, and equally advanced chipmaking equipment.
In the end, the thesis for investing in Applied is roughly the same as investing in a fabrication company like Taiwan Semiconductor, long one of my favorites. You probably don't need both in your portfolio, but if you were going to buy one, Applied Materials shares have rarely been cheaper than they are now.
Now it's your turn to weigh in. Should Applied Materials make our list of 11 O'Clock Stocks? Let the debate begin in the comments box below, and when you're done, click here to get today's 11 O'Clock portfolio pick.
Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of Taiwan Semiconductor at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool owns shares of and has written puts in Intel. The Fool is also on Twitter as @TheMotleyFool. Its disclosure policy enjoys a good tan during the summer.