This article is part of our Rising Star Portfolios series.
On April 26, I decided to buy about $1,000 worth of Applied Materials
Since that time, shares have dropped a staggering 15%. So what the heck exactly happened, and what does it mean for the semiconductor industry as a whole?
Overpaid or overhyped?
On May 4, Applied Materials announced that it would purchase semiconductor manufacturing company Varian Semiconductor Equipment
Several analysts cite the Japan disaster, macroeconomic factors, and the overall cyclicality of the semiconductor industry as potential reasons why Applied could miss its 2011 targets. An analyst from Citigroup thinks it is "still a little too early to get more bullish on AMAT," although overall, there doesn't seem to be a huge amount of downside at this point.
Sure, the 55% premium might seem like a lot to pay for a competitor or peer, but Applied is simply following its predetermined strategy of diversifying and preparing for the next cycle of chip demand. As mobile growth explodes, companies like Applied have to be ready to jump in when demand accelerates, and that's exactly what they are doing.
According to CEO Michael Splinter: "The pace of product innovation is accelerating, requiring devices that are more mobile, more connected and more personalized... Combined, Applied and Varian will be better positioned to help our customers solve these complex challenges and deliver long-term value to shareholders."
The ultimate price tag that Applied paid for Varian shows that big players obviously are valuing other companies at a much higher level than the overall market is. Combined companies can consoldiate huge hoards of cash (Applied alone has more than $3 billion in cash and negligible debt), and one possible consolidation in the industry means that we can probably expect more in the near future. According to Bloomberg, ASML Holding
My Foolish bottom line
Of course, no one likes to see a stock drop 15% just one month after purchasing it, especially as the overall market does much better. However, consider Varian's area of expertise: ion-implementation machinery, which is used in various types of chips, but most importantly in solar panels and LEDs. These are two areas that Applied has targeted as growth areas for the firm, and as diversification becomes more and more significant in the semiconductor industry, I'm all for paying up – especially for a company whose sales doubled in the last year.
Interested in following along with my portfolio, or getting the latest updates for Applied Materials? You can add the company to My Watchlist, which will give you the most recent news and commentary.
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Jordan DiPietro owns no shares mentioned above. The Motley Fool owns shares of Applied Materials. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.