Is Applied Materials in the right business? Well, unless you think that the human race is going to suddenly stop using computers, cell phones, cars, or most other electronics, the answer is a resounding "yes." Applied Materials makes the systems that produce the semiconductor chips that power so many of the products that we use daily. Products made by companies like Motorola, Nokia, Dell, Compaq, Intel, IBM, Qualcomm, and many others.
When you invest in Applied Materials, you are buying a company that provides the technological backbone for some of the most successful companies in the world today. These same companies are on the forefront of technological advances in the use of semiconductors and chips. Several of these companies rely on Applied Materials to provide them with the products that allow them to manufacture the chips that are going into so many of today's electronics. That's what I call being in the right business.
Is this the right time for Applied Materials? Consider the fact that the United States is the most technologically advanced nation on the planet. The potential market within this country for goods that use chips and semiconductors continues to be amazing. If that's not a rosy enough picture for you, consider that the potential global market for computers, cell phones, and electronics stuffed with chips made with equipment purchased from Applied Materials has never been greater. The use of personal electronics, computers, and cell phones is poised to explode around the world. Applied Materials is in an excellent position to benefit from this growth.
Perhaps the toughest question to answer well is whether Applied Materials has the right capabilities to capitalize at this time and in this business. It requires us to assess Applied's responsiveness to change, and to challenges they may face in the future. My research suggests that Applied Materials is presently focused on improving its responsiveness to customer needs, to focusing its product line on the newest technologies (e.g., use of copper and the movement toward "technology shrinks"), and to developing "best of breed" systems that will put it at the forefront of the semiconductor fabrication business.
There is nothing that I have researched to suggest that Applied will drop the ball in the near- to long-term future. That is not say that future sales are a slam-dunk (sorry for the basketball analogies, but I'm still recovering from March Madness). Conditions in the semiconductor sector can change rapidly. For example, the majority of Applied Materials' revenues are from Asia, which is certainly not the most politically or economically stable part of the globe.
However, it can't be denied that the market for chips looks very promising in the long-term, and Applied Material's product line and services are first rate. Consider: The company spent almost $700 million in research, development, and engineering in 1999. At 14% of net sales, that is a substantial investment in making sure future product lines will keep up with advancing technologies. This company is making sure that it will provide the latest and greatest products in the semiconductor-manufacturing sector.
A look at the company's financials shows that future earnings growth is projected to be an annualized 24% over the next five years. Net sales have shot up 60% over the last five years to just under $5 billion. Gross margins are at 50%. Net profit margins are an impressive 17%. Long-term debt-to-equity is at a low 0.13. Combine that with about $3 billion in cash and short-term investments, and I think an argument can be made that Applied Materials will soon be looked at through the lens of the Rule Maker Port by someone here at Fool HQ.
Rick's argument will likely focus on the cyclical nature of the semiconductor industry. Perhaps he will argue that Applied Materials walks a fine line between meeting market demand for the equipment necessary to produce wafers, memory chips, and semiconductors, and the distinct possibility that their customers will flood the market with memory and chips, and thus, never be stable, reliable customers.
This type of cyclical action plagued the company for a few quarters in the last several years, but it has survived with flying colors. Look at it this way: With the potential market for wafers, chips, and semiconductors just taking off in this new century, Applied Materials is in a prime position to parlay its market leadership into market dominance in this sector. I think it is an excellent long-term investment. Now, let's see what the Bear has to say.
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