When it comes to solving the semiconductor shortage, Applied Materials (NASDAQ:AMAT) stock is at the front of the line.
Before Nvidia (NASDAQ:NVDA) designs the chips and before Intel (NASDAQ:INTC) makes the chips, Applied must make the necessary manufacturing gear.
This made 2021 a grand year to own AMAT stock. Shares are up 82% through early December. They closed Dec. 8 near an all-time high, at $157.29 each. Despite this, the price-to-earnings ratio of 24.58 is not excessive. Analysts at Citigroup (NYSE:C) are pounding the table for the stock, telling investors to buy, buy, buy.
A Banner Year
Applied announced fourth quarter earnings on Nov. 18 and the results couldn’t be finer. Net income was $5.9 billion, $6.40 per share, up 63% from the previous year.. Revenue of $23 billion was up 34%, and the net operating margin was 33%. Numbers were even better on a non-GAAP basis.
If you want to find a touch of gray in those numbers, fourth quarter gains trailed those of the full fiscal year. Also, the chip shortage is hitting the chip equipment market, according to CEO Gary Dickerson. “We expect supply shortages of certain silicon components to persist in the near-term,” he said. About $300 million in expected fourth quarter revenue had to be pushed into fiscal 2022.
What that means is that the good times should continue to roll, even longer than what might be expected. Semiconductors have in the past been a boom-and-bust business, prices firming until demand is exhausted, then falling hard. What’s happening now is a “super-cycle,” with new cloud-and-device based applications continuing to soak up supplies.
Not the Only Winner
Back in the 20th century, when my brother-in-law worked for Applied, the company’s fate was closely tied to that of Intel. This is no longer the case. Today it’s based on investing ahead of growth in artificial intelligence and robotics. Applied has also expanded far beyond its Santa Clara base, even opening two facilities next year in Kalispell, Montana.
Applied does have competition, with LAM Research (NASDAQ:LRCX) often touted as an industry winner. But in 2021, Applied’s stock performance has outpaced LAM’s by about 2-1.
This puts AMAT stock in rarified company, alongside that of Nvidia, which is up 130% so far in 2021. Net income at Applied Materials has been rising twice as fast as revenue, and in semiconductor systems it’s up 78%.
Any Bears Around?
You can’t buy yesterday in the stock market, only tomorrow. There are always going to be bears, even in a stock like Applied. That’s good, because if everyone is in a stock, there’s no one left to buy, and the price must go down.
In the case of Applied, the bear case is based on lower-than-expected forecasts, which have some preferring the chip makers to their suppliers. You also have those who say this year’s run-up can’t be repeated. Of 18 analysts following Applied and tracked by TipRanks, just three are calling it a “hold” for exactly that reason.
The Bottom Line on AMAT Stock
Downgrades of Applied stock, like one issued in September by New Street Research, are generally tactical in nature. Since the New Street downgrade, the AMAT stock price is up only 3%.
But tactical downgrades should not worry long-term investors. Over time, such things tend to even out. Applied is one of those stocks you can accumulate steadily, with confidence that its value will hold and even rise. Not every year will be 2021, but the stock’s not expensive, and “normal” performance should suit your portfolio fine.
On the date of publication, Dana Blankenhorn held a long position in NVDA and INTC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. Just in time for the holidays, he has a collection of COVID-19 stories at the Amazon Kindle store. Write him at email@example.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.