Nvidia set the negative tone last week when it forecast deeply lower revenue in the current quarter. Applied Materials (NASDAQ:AMAT), considered a bell-weather for chip stocks alongside Lam Research (NASDAQ:LRCX) and Micron Technology (NASDAQ:MU), is the company to look at closely.
Applied reported revenue growing just 1.0% Y/Y to $4.01 billion. EPS in Q4 was $0.97. Though the numbers are weak, net income, low debt, and low valuations (P/E in the 8 times range) are compelling. Even with slow growth ahead, one may argue a 30% upside on the stock.
AMAT expects headwinds continuing in the near-term yet this chip cycle pattern is different. It is now seeing a large fluctuation that is typical in semiconductor and display equipment industries correction, as experienced in the past. Management has a clear idea on when business will pick up. On its conference call, it said that customers are telling Applied that demand will pick up and pricing will stabilize in the second half of 2019.
In this round of an inventory chip correction, the industry does not have an excess of supply. Supply and demand are relatively well-balanced, so the pullback in memory spending is likely lighter than in previous cycles.
With AMAT stock hovering near lows for the year, disciplined, patient value investors should consider this chip company for its diversified business and lower risk.
