Applied Materials: New Highs Approaching

Trade tensions between the U.S. and China are hurting stocks trading in the semiconductor market but Applied Materials (NASDAQ:AMAT) is the exception to the rule. The company’s glowing second-quarter and third-quarter outlook suggests new highs for the year approaching.

AMAT’s second-quarter revenue fell 23% but still beat consensus. All units – Semiconductor Systems, Applied Global Services, Display and Adjacent Markets - performed above analyst expectations.

The dividends of $189 million and stock buyback of $625 million outpaced free cash flow ($682 million) and is something for investors to watch out for. In fact, AMAT increased its dividend from $0.20 to $0.21, a move that signals management’s confidence that FCF growth will increase for the rest of the year.

Applied expects inventories to normalize this year. In 2020, the environment will favor capacity investments that will lead to a long-term acceleration in the company’s growth.

A decline in the display unit is due to customers delaying and pushing out orders. Beyond this year, both larger substrates/tv manufacturing and flexible and rigid display in mobile will reverse the downtrend.

Overall, AMAT is positioned for the AI and big data era. The positive inflection point for semiconductor demand is in play. Ongoing R&D investments in all of its many business lines will continue to pay off. Chances are good the stock bottomed recently in the high $30’s and is on the way to close at new yearly highs.