Is Applied Materials a Buy?

Company Overview - Applied Materials is the largest semiconductor equipment company by revenue and has the most diversified market reach [2] - The company has seen its stock retreat over 32% from all-time highs in July, despite the AI boom driving demand for leading-edge chips and HBM memory [2] - The semiconductor equipment industry is highly consolidated, with only one or two options for each step in the manufacturing process, giving companies like Applied Materials significant competitive advantages [3] - The semiconductor industry has grown faster than the economy over time, with increasing chip demand across consumer and enterprise devices, further accelerated by AI [4] - Applied Materials has benefited from the increasing capital intensity of leading-edge semiconductor production, leading to high margins and returns on capital [5] Recent Downgrade and Concerns - Morgan Stanley downgraded Applied Materials earlier this month, citing concerns about China's declining demand due to new sanctions and the pull-forward of equipment orders by Chinese producers [6][7] - Non-AI chip manufacturing segments are not recovering as expected, with foundries outside of TSMC dialing back growth aspirations, particularly Samsung facing technology execution issues [8] - Morgan Stanley predicts a "transition" year for Applied in 2025, with the wafer fab equipment industry expected to decline by 6%, though some segments may grow [9] Investment Opportunity - Despite the downgrade, Applied Materials is trading at around 20 times trailing earnings, making it a potentially solid buy [10] - The company's services business, tied to its installed base, is expected to grow annually, potentially offsetting a mid-single-digit decline in new equipment sales [11] - Share repurchases and strong cash generation could keep EPS flat or even growing in a downturn, with the company holding over $8 billion in cash against $6 billion in debt [12] - Consensus estimates project Applied's EPS to grow to $9.50 this fiscal year, up from $8.65 in fiscal 2024, placing the stock at 18 times next year's estimates, a below-market multiple [13] - Long-term secular drivers for the wafer fab equipment market remain intact, including AI, complex chip architectures, and countries seeking leading-edge production domestically [14]