Two-thirds of the way through 2012, it's pretty clear that not only were expectations for a semiconductor and semiconductor equipment recovery wrong, they were off by a wide margin. As Applied Materials (Nasdaq:AMAT) continues to see business erosion, it has to test the patience of even the most loyal or long-term shareholder. While spending will recover someday and the shares will have their day again, the shares are likely to be volatile in the short term.
Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

So This is 'Solid'?
I have to wonder what world Applied Materials management lives on to title its third quarter earnings news release with "Solid Third Quarter Results". Not only did management guide down again back in July, but a double-digit year-over-year revenue decline is not my idea of a solid performance.

Revenue fell 16% from last year and 8% from the Q2 with spotty performance across the board. While sales in the SSG segment were up more than 10% from last year, they also dropped 13% sequentially. Conversely, while AGS and Display both showed some modest sequential growth, they were down year-over-year.

Margins, too, continue to erode with sales. Gross margin (non-GAAP) slid a half-point from the second quarter. Operating income dropped about 12% sequentially, with a roughly one-point decline in operating margin.

SEE: Understanding The Income Statement

Well ... It Could Have Been Worse!
If there is solidity to Applied Materials' performance, it is in how the company has held up relative to other players in the industry. On a relative basis, Applied Materials' financial performance compares relatively well to Lam Research (Nasdaq:LRCX), ASML (Nasdaq:ASML) and Tokyo Electron. So at least investors can find some consolation from the fact that it's just as much an industry-wide problem as a company execution issue.

That said, business is still looking decidedly unsolid. Orders dropped one-third from the Q2, with SSG orders down 41%. AMAT is still seeing the effects of a weak spending environment for memory players, including a sizable order push-out from a big foundry customer (perhaps Samsung?). As a result, management cut guidance yet again, with its revenue forecast for the next quarter about 20% below analyst estimates. Likewise, the display market remains weak - not good news for companies like Corning (NYSE:GLW).

What Now?
A handful of equipment companies are showing some relative strength, due to their positions at different parts of the semi manufacturing cycle and/or different end-market exposures. Companies like KLA-Tencor (Nasdaq:KLAC) and Hitachi High-Tech aren't doing too badly; the latter delivered a beat-and-raise quarter with positive revenue growth just a month ago.

I won't pretend to know when the semiconductor industry will finally bottom, just that eventually it will. What's more, the ongoing evolution in the industry means increasing demands on and for equipment. Applied Materials estimates that the move from 28 nm to 20 nm will increase the number of steps at various production stages by as many as 30, and that will mean more sales and higher ASPs. What's more, the incredible R&D demands of staying in the game are starting to weigh on even the big players - ASML has had to solicit customers like Intel for strategic investments to fund next-gen research. That ought to be a long-term positive for Applied Materials, as it has the capital to reinvest in R&D that smaller rivals may not.

SEE: A Primer On Investing In The Tech Industry

The Bottom Line
I know I'm in "broken record" territory when it comes to talking about AMAT's investment prospects. It's undervalued based on its long-term prospects, there's huge uncertainty about the timing of a turnaround, tech investors don't reward value with no growth, and so on.

For whatever it's worth, though, I still believe all of that. If Applied Materials were to retest valuation lows of 2 times tangible book, that would mean a further 50% lopped off the stock. But I think the sort of market/economic environment that would bring that about would crush a lot of tech stocks in addition to Applied Materials. Consequently, I do think these shares are undervalued, but I can't muster a lot of enthusiasm for owning them myself.

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

Related Articles
  1. Stock Analysis

    Fortinet: A Great Play on Cybersecurity

    Discover how a healthy product mix, large-business deal growth and the boom of the cybersecurity industry are all driving Fortinet profits.
  2. Stock Analysis

    2 Catalysts Driving Intrexon to All-Time Highs

    Examine some of the main reasons for Intrexon stock tripling in price between 2014 and 2015, and consider the company's future prospects.
  3. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  4. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  5. Markets

    Why Gluten Free Is Now Big Business

    Is it essential to preserving your health, or just another diet fad? Either way, gluten-free foods have become big business.
  6. Technical Indicators

    4 Ways to Find a Penny Stock Worth Millions

    Thinking of trading in risky penny stocks? Use this checklist to find bargains, not scams.
  7. Professionals

    Chinese Slowdown Affects Iron Ore Market

    The Chinese economy's ongoing slowdown is having a major impact on iron ore demand.
  8. Investing Basics

    Why do Debt to Equity Ratios Vary From Industry to Industry?

    Obtain a better understanding of the debt/equity ratio, and learn why this fundamental financial metric varies significantly between industries.
  9. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  10. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  4. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  6. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!