Internet of Things Trend Will Push This Stock Higher
Today’s chart highlights why I am writing about this stock and deploying one of my favorite methods for picking top stocks that are riding the emerging technology trends.
The “picks and shovels” method is something that I have covered before as well, for the sole reason that it is such a simple and effective way to pick the multi-baggers of tomorrow. Instead of taking higher risks by investing in the well-known players gaining from new technology trends, why not mint money by investing in the stocks of companies that supply to these big players?
Applied Materials, Inc. (NASDAQ:AMAT) is one such stock. This is a company that supplies manufacturing equipment, software, and services to the semiconductor, flat panel liquid crystal display, and associated industries. The core customers are the manufacturers of semiconductor chips, LCDs, and other electronic devices.
Now these manufacturers are flying high on a new technology trend called the Internet of Things (IoT). The term basically implies that there is a network of physical devices that we use in our daily lives, which are embedded with electronics, software, or sensors that let these devices collect and exchange data. This network will become stronger in the coming days as the hold of the information society gets stronger.
This means that, as the number of connected devices keeps increasing in the coming years, so will the number of different types of chips required to be put into these devices. This would result in a large number of chip makers investing in new equipment to meet the rising demand. And the companies benefiting from this trend would be the ones in the semiconductor manufacturing equipment industry—a leading player like Applied Materials.
Just to lend some color to the IoT market, recent research by Gartner, Inc. says that 8.4 billion connected “things” will be in use around the world in 2017, an increase of 31% from 2016. Gartner forecasts that this number will touch 20.4 billion by 2020 and that total spending on endpoints and services will reach almost $2.0 trillion in 2017. (Source: “Gartner Says 8.4 Billion Connected “Things” Will Be in Use in 2017, Up 31 Percent From 2016,” Gartner, Inc., February 7, 2017.)
With the rise in demand for products that make the IoT work, customers of Applied Materials will increase their investments in equipment for manufacturing these products, thus benefiting both the company and AMAT stock.
Now, let’s take a look at the chart that I mentioned in the beginning of this article.
As per research by IHS Markit Ltd, the annual revenue of the chip business has almost doubled since 2003 to $352.0 billion, with no slowing down in growth in the near future. (Source: “In the Chips: Tech’s Sleeping Giant Becomes a $352 Billion Cash Cow,” The Wall Street Journal, April 26, 2017.)
This resurgence in the semiconductor industry resulted in AMAT stock becoming one of the top performers in the S&P 500 index last year, as the growing chip demand pushed up the demand for its chip manufacturing equipment.
Let’s take a look at the business segment that contributes the most to the net sales of the company: “Semiconductor Systems.”
|Applied Global Services||6%||$2,589||16%||$2,447||$2,114|
|Display and Adjacent Markets||28%||$1,206||11%||$944||$848|
|Corporate and Other||18%||$157||1%||$133||$132|
*All dollar figures in this table are in millions.
(Source: “2016 Annual Report,” Applied Materials, Inc., December 31, 2016.)
The Semiconductor Systems segment gained from the steady overall demand for semiconductor equipment, with the continued investment in technology upgrades and additional capacity by purchasers of computer memory.
The demand for semiconductor chips is just going to keep rising, and Applied Materials stock has the potential to more than double its investors’ money in the span of a few years.
Just to add context, AMAT stock has gone up by more than 100% over the last year, and a whopping 247% over the last five years!
Moreover, the company grew its earnings by over 47% last year and delivered record adjusted earnings of $0.67 in the fiscal first quarter. Net sales at $3.28 billion were up 45% year-over-year. The new orders for the first quarter were $4.24 billion, an increase of 86% year-over-year, which was another record set by Applied Materials.
The management team expects the momentum to continue, and investors can expect strong revenue and earnings growth per share in the second quarter of FY2017. The price of AMAT stock may see a further rise when that happens.
The Bottom Line on Applied Materials Stock
As the company announces its second-quarter results this month, there is a lot of excitement in the air. The company is expected to post another round of record numbers. Beating such sky-high expectations could get difficult at times, however, which may lead to a downward spiral in Applied Materials stock.
However, any decline in the stock price would be an opportunity to benefit from the strong tailwinds in the areas of IoT, cloud infrastructure, smart vehicles, etc. The company stands to gain from the increasing demand for a broader mix of chips to serve the more diversified variety of applications. AMAT stock is well positioned for triple-digit upside, and investors wouldn’t want to miss this potential multi-bagger.