Applied Materials, Inc. (NASDAQ:AMAT) isn’t a Johnny-come-lately tech firm that moved into Silicon Valley as the dot-com boom heated up.
It started its Mountain View operations in 1967, while Crosby, Stills, Nash and Young were still Buffalo Springfield and Lyndon Johnson was still president. And it has been doing the same kind of work for the chip industry that it was doing back then.
Today, its revenue is derived from three main businesses — semiconductor equipment and services, visual display manufacturing and global services.
And given the fact that we’re entering a new golden age of semiconductors, as artificial intelligence, the Internet of Things, cloud, mobile and Big Data computing are transforming every aspect of our lives.
According to the industry group SEMI, worldwide semiconductor manufacturing billing was up 58% in the first quarter of 2017 compared to the same quarter a year ago. Sequentially, billing was up 14%, to $13 billion for the quarter.
Korea’s billings were up 110% year-over-year; Taiwan’s were up 84% YoY, but down sequentially; China was up 74%; and Japan was up 19%. AMAT has significant clients in all these markets.
And when their business grows, so does Applied Materials’. That’s principally why AMAT stock is up 40% year-to-date.
Some analysts warn that its display division isn’t seeing the kind of growth that its semi division and global services divisions are, and that may be the case in the short term.
LCD displays are a mature market and the transition from old-style TVs to new slim TVs is complete. But that market is now transitioning to OLED displays, which are also becoming the go-to options for most smartphones.
What’s more, even if AMAT’s display division continues at the pace it’s on, the growth in semiconductors (almost two-thirds of its revenue) and global services will more than make up for any slack in displays, which only make up about 10% of revenue.
And growing demand for the newest generations of smartphones may mean the display division may see an increase in growth in coming quarters.
But AMAT’s essential business is helping semiconductor manufacturers make high-quality chips on the cheap. It relies more on its expertise in systems engineering and design than it does on simply selling products.
It’s a knowledge-based tech firm that is at the heart of global chip industry. And given its longevity, it has built a substantial competitive moat around its core business.
By market capitalization, AMAT is twice the size of its closest competitor KLA-Tencor Corp (NASDAQ:KLAC), which is testament to its position in the industry. That means as long as demand in semis is high, AMAT will continue to grow at a similar clip.
It’s also good to know that even when the chip market was slow, AMAT was still growing its return on equity and its net income margins. That shows management knows what to do to keep the lights on in the cyclical tech markets.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
