Applied Materials (AMAT): Not The Best Way To Play Semiconductors

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Applied Materials, Inc. (NASDAQ:AMAT) provides manufacturing equipment for semiconductor companies. The tech company offers products for front-end and computing applications. The slowdown in the PC and computer markets has pressured this space, given that over two-thirds of semiconductors are used in PCs. Billionaire Steve Cohen of SAC Capital added Applied Materials to his portfolio last quarter (check out Steve Cohen’s top picks).


Applied Materials is expected to still see weakness with sales down 10% in FY2013 after a 12% decline in FY2012. Generally speaking, middle-market semiconductor companies are struggling due to declining growth opportunities. Research firm Gartner expects below-average growth rates for the tech firm’s silicon business, which makes up about half of Applied Materials’ total business. Issues in the solar industry should continue to be a drag on the company, with mobile devices being the obvious driver. This bullish trend will be supported by the adoption of LTE networks in developed nations, including the network’s rapid adoption in the U.S.

From a valuation standpoint, Applied Materials has seen major pressure related to continuing restructuring actions, which now has the stock trading at over 100x earnings. Applied trades at the cheapest on a P/S basis at 1.7x sales and is also one of the cheapest on a forward P/E basis at 13x. This is, however, for good reason, given that its long-term earnings growth rate of 9% is the lowest in the industry.

What about its competitors?

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