As markets look ahead to the deployment of 5G, chip stocks have done very well in 2019. As the world’s largest semiconductor fabrication equipment supplier, Applied Materials Inc. [
Applied Materials has been around for a long time (it was incorporated in 1967), and investors who have held the stock for 30 years have earned 19% per annum, but the stock has seen it ups and downs. Most notably, last year, AMAT dropped to $30 right before the end of 2018, but the stock rebounded this year up more than 80% YTD at the time of writing. The turnaround has largely been a pleasant surprise as global semiconductor sales slowed in 2019 along with LCD and OLED TVs. Overall, Applied Materials saw net sales drop 13% from 2018 to 2019. Earnings per share, adjusted for one-time items, also declined by 27% to $3.04.
One thing to note is that Applied Materials has great leadership—Gary Dickerson is often in the conversation for best CEO—and the company honors its shareholders. Over the past year, Applied Materials returned $3.2 billion to shareholders in the form of stock buybacks and dividends.
All told, Applied Materials’ recent turnaround seems like a bet on a future where semiconductor makers are no longer bound by a feast or famine cycle. Moreover, the company helped itself by purchasing memory equipment maker, Kokusai Electric, in July for $2.2 billion in cash. The deal strengthens AMAT’s footprint in Asia and positions it well in the event that memory demand increases.
Most outlets including Forbes see the semiconductor downcycle ending by Q2 2020. The birth of 5G technology is the catalyst behind this reversal. IHS Markit predicts global semiconductor revenue to increase to $448 billion from $422.8 billion in 2019. 5G technology’s deployment will cause multiple sectors to upgrade equipment along with enterprises across the world. The smartphone industry will be one of the first sectors to see an unprecedented demand for new chips.
“5G’s impact will spread far beyond the confines of the tech industry, impacting every aspect of society and driving new economic activity that will spur rising demand for microchips,” said Len Jelinek, senior director, semiconductor manufacturing for IHS Markit.
PwC also sees semiconductors growing in 2020 with memory chips maintaining the largest market share through 2022. AI-related semiconductors are another area PwC sees huge growth with the company predicting 50% CAGR through 2022.
So, the real question for Applied Materials is this: How much of the upcoming boom in semiconductors is already baked into the current share price? Many are still bullish on the Santa Clara, California, company, even after such a great 2019. Analysts at Cowen see the stock going above $80 based on the predictions that Applied Materials will finally see a significant increase in total revenue.
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Equities Contributor: Stephen L. Kanaval
Source: Equities News
