Our Applied Materials Stock Prediction In 2019 (Buy or Sell?)

Pass the aspirin. The daily political shout fest in the nation’s capital is enough to give you a headache. The partisan bickering is so loud and bitter, it’s drowning out the news of importance for investors.

Here’s my advice: ignore the media’s sound and fury. The news networks like to whip up drama to boost ratings. They’ll build up a politician one day, so they can knock him or her down the following day. It’s all designed to keep you glued to your TV set.

As an investor, you need to think less about the circus along the Potomac and more about corporate fundamentals. Look for growth that’s trading at a bargain.

One growth stock that appears to be a bargain right now is Applied Materials (NSDQ: AMAT), the world’s leading supplier of the ultra-sophisticated high-tech equipment used in the fabrication (aka “fab”) plants that manufacture semiconductors.

AMAT is plugged into several technology mega-trends that will unfold for years to come (regardless of what’s in the Mueller report). However, a looming economic slowdown, as well as concerns about a glut of chips, are among the potential headwinds for the company.

Is Applied Materials a good bet in 2019? Or is AMAT just too risky? Let’s dig for answers.

Table of Contents

What Is Applied Materials?

Applied Materials (market cap: $36.9 billion) provides manufacturing equipment, services, and software to the semiconductor, display, and related industries. It operates through three divisions: Semiconductor Systems, Applied Global Services, and Display and Adjacent Markets.

The Semiconductor Systems division develops, manufactures, and markets manufacturing equipment used to make semiconductor chips or integrated circuits. The Applied Global Services division provides integrated solutions to optimize equipment and fab (chip factory) performance comprising spares, upgrades, services, remanufactured equipment, and factory automation software.

The Display and Adjacent Markets division provides products for manufacturing liquid crystal displays; light-emitting diodes; and other display technologies for TVs, monitors, laptops, personal computers, electronic tablets, smartphones, and other devices.

Applied Materials is targeting hot tech areas such as autonomous cars, artificial intelligence (AI), machine-to-machine (M2M) learning, the Internet of Things (IoT), virtual/augmented reality (VR/AR), and the cloud.

Headquartered in the heart of Silicon Valley in Santa Clara, California, Applied Materials operates in the U.S., China, Korea, Taiwan, Japan, Southeast Asia, and Europe.

How Has Applied Materials Stock Performed?

  • Over the past 12 months, AMAT has lost 29.7% and the S&P 500 has gained 7.3%.
  • Over the past two years, AMAT has gained 0.08% and the S&P has gained 18.7%.
  • Over the past five years, AMAT has gained 50.4%, the S&P 500 has gained 92.2%, and the benchmark iShares PHLX Semiconductor ETF (SOXX) has gained 137.8%.

How Has Applied Materials Performed In 2017/2018?

  • In 2017, AMAT gained 60% and the S&P 500 gained 19.4%.
  • In 2018, AMAT lost 39.3% and the S&P 500 lost 7.5%.

Who Are Applied Materials’ Rivals?

Intel (NSDQ: INTC)

With a mammoth market cap of $239 billion, Santa Clara-based Intel is the largest maker of semiconductors in the world.

Intel’s PC business remains its biggest operating unit, accounting for two-thirds of sales. Intel is likely to continue its dominance of the PC microprocessor market over the long haul.

The semiconductor world is divided between fab and “fabless” companies that design the chips that fab companies produce. Intel has a foot in both worlds, as a designer and producer of chips.

Advanced Micro Devices (NSDQ: AMD)

Advanced Micro Devices, also based in Santa Clara, develops computer chips and related technologies for business and consumer markets.

AMD’s core products include microprocessors, motherboard chipsets, embedded processors, central processing units (CPUs), and graphics processing units (GPUs). With a market cap of $26.9 billion, AMD is the world’s second-largest chip maker.

Read This Story: AMD Stock Prediction In 2019 (Buy or Sell?)

Lam Research (NSDQ: LRCX)

With a market cap of $27.1 billion, Lam Research designs, manufactures, markets, and services semiconductor processing equipment used in the fabrication of semiconductors.

Lam’s products are used primarily in front-end wafer processing, which entails the steps that create the active components of semiconductor devices and their interconnects.

Based in Freemont, California, Lam also builds equipment for back-end wafer-level packaging and for related manufacturing markets such as for microelectromechanical systems.

The aforementioned three companies are standouts among a long list of tough competitors to AMAT.

Read This Story: Our Texas Instruments Stock Prediction In 2019 (Buy or Sell?)

Will Applied Materials Go Up In 2019 (Should You Buy)?

Applied Materials is strongly committed to research and development (R&D), which has kept it several steps ahead of its competition. The company consistently reinvests profits into developing new and better chip-manufacturing equipment. Over the last five years, the company’s R&D expenditures have averaged about 15% of net sales, with an emphasis on IoT, Big Data, and AI.

Applied Materials’ business, like the semiconductor industry as a whole, is typically cyclical. In 2019, however, demand for the company’s invaluable chip-making tools should be less susceptible to the ups-and-downs of the economic cycle, making the stock inexpensive at its current level.

In this video, Applied Materials CEO Gary Dickerson discusses the company’s embrace of such innovations as IoT and AI, which are growth drivers with multi-year momentum.

Applied Materials can afford outsized R&D spending because the company is financially sound, with a total of $3.7 billion in cash on hand and a manageable debt-to-equity ratio of 0.65. The company generated free cash flow of $3.1 billion in 2018. The solid balance sheet will give Applied Materials the necessary ballast to stay on an even keel during the coming storms of 2019.

Will Applied Materials Go Down In 2019 (Should You Sell)?

Tech stocks led the rise of the stock market in 2017 and most of 2018. They swooned during the latter part of 2018, along with the broader market. The Silicon Valley stars touted on financial TV shows got way ahead of themselves, sporting nosebleed valuations destined for a fall. Many of these tech stocks remain overpriced and shaky.

Headline risk is worsening. The global economy is slowing and the end of the U.S.-China trade war is nowhere in sight. Applied Materials’ CEO Dickerson this month warned of negative fallout for his company and the tech sector as a whole from the tit-for-tat tariff battle.

Many analysts predict an economic slowdown in 2019, or 2020 at the latest. The bull market and economic recovery are both long in the tooth; financial and economic laws have not been repealed. Investors are overdue for a prolonged slump in share prices.

Most companies won’t be immune, especially tech stocks that have been media darlings for such a long period of time. The semiconductor industry in particular faces a glut combined with sputtering demand.

Overall Applied Materials Forecast And Prediction For 2019

I’ve just summarized the pessimistic view, which I believe is overstated. When it comes to Applied Materials and its singular attributes, I’m siding with the optimists.

To be sure, the tech sector and broader stock market swooned in the latter part of 2018, but both are rebounding. Non-FAANG players such as Applied Materials are better positioned for survival during the headwinds of 2019 due to strong fundamentals, product differentiation, and attractive valuations.

Applied Materials isn’t just another fad stock; it’s a picks-and-shovels play on the biggest technology trends that affect our daily lives. Continuing apace are breakthroughs in cloud computing, Big Data analysis, AI, autonomous vehicles, VR/AR, digital personal assistants, and IoT.

The U.S. also is on the cusp of wide-spread deployment of 5G ultra-fast wireless networks. This deployment will accelerate in 2019, lifting the tech sector as demand booms for handheld gadgets and chips that provide greater memory. Meanwhile, economic growth in the U.S. remains on track. albeit tenuously.

The average analyst expectation is for Applied Materials to post year-over-year earnings growth next year of 27%. Over the next five years, growth is expected to come in at 10.7%, on an annualized basis.

And yet AMAT’s 12-month forward price-to-earnings ratio (FPE) is only 10.3, compared to 17.5 for the S&P 500, 25.4 for AMD, 10.5 for INTC, and 11.9 for LRCX. AMAT’s dividend yield of 2.12% is enticing as well.

Applied Materials is a bargain right now, due to excessive worries about a slowdown in the chip sector. Ignore the naysayers. Unstoppable trends are unfolding that will propel demand for the company’s products in 2019 and beyond. AMAT is a rare tech bargain that you shouldn’t pass up.

As for the political turmoil in Washington? It comes and goes. Keep your sense of perspective… and keep the “mute” button handy.

John Persinos is the managing editor of Investing Daily.