Applied Materials has been ripe to move higher since its last earnings report 

In a volatile market where stocks look overvalued, it doesn’t take much to send a stock lower. That was the case with Applied Materials (NASDAQ:AMAT).  The manufacturer of semiconductor chip components has seen its stock drop nearly 10% after the company missed on both the top and bottom lines when it reported earnings on November 18, 2021. However, both revenue (31%) and earnings (55%) were significantly higher on a year-over-year basis.  

With that said, the misses weren’t egregious. They were simply at the lower end of the company’s forecast. And the reason for the miss, supply chain disruption, was not unusual. However, it was amplified because Lam Research (NASDAQ:LRCX) which makes up the other half of a near duopoly in the chip manufacturing business did not report supply chain issues when it reported earnings.  

The reported loss due to the supply chain disruption was $300 million. If that revenue was added back in, Applied Materials would have beat analysts’ expectations.  

However, the market doesn’t typically respond to ifs and buts. And the earnings report gave investors a reason to sell AMAT stock. But a month after earnings, the stock is showing a bullish technical setup. The share price has been consolidating and it’s now trading slightly below a key support level. We recommend that investors consider a position in AMAT stock.  

Cyclical No More? 

Semiconductor stocks have historically been cyclical in nature. Simply put, they would be a harbinger of economic growth. And conversely, a harbinger of slower economic activity.  

But that appears to be changing. It may be impossible to back up a claim that this is no longer a cyclical sector. But it’s not irrational to suggest that chip stocks may be in the still early stages of a super cycle.  

Chips will be needed in applications like 5G, artificial intelligence, the Internet of Things (IoT), and autonomous vehicles (not to mention the current generation of electric vehicles). But we’ve entered a world of digital everything. And that means more and more of the daily items we purchase will require computer chips.  

That insatiable demand sets up extremely well for Applied Materials which is trading at just over 23x past earnings. This suggests that the market is not fully pricing in future growth in the semiconductor sectors.  

And this may allow investors to overlook what still appears to be a high valuation.  

A Picks-and-Shovels Play on the Chip Sector 

Investors who are familiar with Applied Materials know them as the company that makes the essential components that make semiconductor chips. The company has what is considered to be the broadest portfolio of equipment in the sector. So as long as the demand for semiconductor chips remains strong demand for the materials that Applied Materials provides will remain strong.  

The company issued guidance for the next quarter to generate revenue between $5.91 and $6.41 billion. That was also lower than what analysts expected even though the company had not previously issued guidance for its fiscal first quarter.  

That revenue, in whatever form it takes, is likely to go directly to the company’s bottom line. Operating margins hit a record high of 32.9% in the last quarter. And the company is using that free cash flow to buy back shares and to increase the company’s dividend. Applied Materials has increased its dividend in each of the last five years and has a three-year dividend growth rate of 117.5%  

Since the earnings report, the analysts tracked by MarketBeat shows that analysts across the board have upgraded the company’s price target. And that means that if the company shows that demand remains strong with strong revenue in future quarters, we expect to see the stock price of Applied Materials to climb.