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Why Applied Materials Stock Is Down 30% So Far in 2018

Nicholas Rossolillo, The Motley Fool

Semiconductor stocks have been under pressure this year. Several Wall Street analysts have downgraded their outlook for the industry as they see sales growth grinding to a halt in 2019 or even experiencing a downturn. Many chipmakers have suffered as a result, even as they continue to post positive momentum and an optimistic outlook.

One of the hardest-hit names in the business has been chip-manufacturing supplier Applied Materials (NASDAQ: AMAT). With the winds of change causing short-term uncertainty, investors have sent the stock down roughly 30% so far in 2018.

A broad play on the chip industry

Applied Materials is a seller of basic materials, technology, and process services for the semiconductor industry. Therefore, while it doesn't produce its own chips that find their way into the devices we use every day, it does play a crucial support role for the manufacturers that do.

As technology increasingly makes inroads into our everyday lives, demand for its most basic building blocks continues to rise. That tailwind helped Applied Materials' business trend higher throughout its recently completed fiscal year.

Metric

Fiscal Year Ended Oct. 28, 2018

Fiscal Year Ended Oct. 29, 2017

YOY Increase (Decrease)

Revenue

$17.25 billion

$14.54 billion

19%

Operating income

$4.80 billion

$3.87 billion

24%

Earnings per share

$3.23

$3.17

2%

YOY = year over year. Data source: Applied Materials quarterly earnings.

But analysts have grown pessimistic, with many of them calling for a pullback in the industry during the first half of 2019 before a recovery later. And results in the fourth quarter, which ended in late October, seemed to back that up. Total sales were up only 1% from a year ago, and earnings fell 2% on lower profit margins.

Memory chips especially have come in for pessimism. They are a historically cyclical segment of the chip business that has been on a run since 2016. A third of Applied Materials' total sales was derived from this area in the last year, so an impending slowdown -- the severity of which will be unknown until it happens -- is weighing on the stock as of late.

An artist's illustration of connected objects. Things like homes, cameras, watches, and cars are illustrated in honeycomb cells.

Image source: Getty Images.

Also of note was a $1 billion tax charge taken due to U.S. corporate tax reform enacted at the end of 2017. That is the primary cause for earnings being up only 2% even though operating profits went up 24% for full fiscal year 2018.

Memory loss is only part of the story

There's more to Applied Materials than memory chip support, though. The company's global support systems and basic material sales continue to rise (up 24% over 2017) as more semiconductors make their way into common objects and devices -- from consumer goods to industrial equipment. New OLED screen technology for TVs and smartphones also continues to be an engine for growth at the company. That segment increased 4% in spite of headwinds in the back half of the year, but the outlook remains positive headed into the new year.

Thus, despite the slowdown, there is still plenty of reason for optimism. The 2019 fiscal-year outlook may be underwhelming -- management called for 12% and 25% decreases in sales and adjusted earnings, respectively, in the first quarter -- but semiconductors should be a rising tide for the company for years to come. For long-term investors, now's the time to consider Applied Materials while there's blood in the water.

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Nicholas Rossolillo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.