You wouldn't really know it by looking at the stock's performance over the past year, but Advanced Energy Industries' (Nasdaq:AEIS) core markets are not doing especially well. While this company is well placed as a provider of power conversion systems for the semiconductor equipment industry and solar inverters, neither the semi CAPEX nor solar markets have been doing well this year. Better days are almost certainly ahead, but a market-beating stock may have already captured some of the gains to come from this recovery.

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Tough Conditions for Now
This has been a generally lousy year for AEIS' customers. Applied Materials (Nasdaq:AMAT), AEIS's single-largest customer, is struggling with double-digit year-on-year revenue drops, and a quick look at other semiconductor equipment providers like ASML (Nasdaq:ASML) and KLA-Tencor (Nasdaq:KLAC) shows this to be an industry-wide phenomenon. It's no better in solar, where former leaders like First Solar (Nasdaq:FSLR) and Suntech (NYSE:STP) continue to struggle through the disappearance of lucrative government subsidies.

All of this is showing up in the results for Advanced Energy Industries. Revenue for the second quarter dropped 16%, with operating income down by more than one-third. Not much is expected for the rest of the year, either. Revenue is expected to be down 6% year-on-year for the third quarter, before rebounding in the fourth quarter.

SEE: Understanding The Income Statement

But the Markets Still Have Long-Term Potential
Arguably the only good thing that can be said about today's market is that it pretty much has to get better. Utilization rates in the semiconductor industry are not great right now, but customer inventories are shrinking. Likewise, chip companies are going to need to upgrade their equipment to meet customer demands for next-gen performance. So while it is definitely true that the "when" of a recovery is still completely in doubt, the "if" still seems likely.

The last few years have made it obvious that, despite significant improvements in cost efficiency, the renewable energy industry was very dependent on government subsidies to drive demand. That's not to say, however, that the industry cannot stand on its own merits; what is more likely is that the weaker players are going to go out of business. Although this process could lead to some instability in order flow for AEIS, the company's inverters are very efficient and I think it is in good shape to benefit from long-term commitments to utilize cleaner energy sources like solar.

Making It Through the Tough Times
It's encouraging to me that AEIS is doing OK financially through what is still a tough end-user market. What's more, relative to publicly-traded rivals like Satcon (Nasdaq:SATC), Power-One (Nasdaq:PWER) and MKS Instruments (Nasdaq:MKSI), AEIS is holding up well. Some of this can be tied to the company's technology-driven share leadership, but it is also moving forward with what I'd call "prudent aggression" to restructure its costs.

SEE: Earning Forecasts: A Primer

The Bottom Line
I'm a little surprised that the stock of AEIS has been this strong ahead of real signs of recovery in chip equipment orders and a broader solar recovery (although AEIS did see double-digit growth from solar in the second quarter). AEIS isn't the only semi-equipment stock to have done well this year ((Ultratech (Nasdaq:UTEK) has done even better)), but it has been one of the better performers.

I have no problem with the idea of investors buying AEIS on the theory that end-market recoveries in semi capital equipment and solar are inevitable and that this company's leadership in key markets will be valuable down the line. Moreover, paying about eight times EBITDA for a company that should be growing EBITDA at a double-digit clip starting next year seems quite reasonable. Although I'd be a little hesitant to buy into this post-QE3 rally, AEIS looks like a stock that still has room to move on the prospects for eventual recoveries in its core addressable markets.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.