This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Investors Are Betting Too Much on Applied Materials

NEW YORK ( TheStreet) -- Shares of semiconductor giant Applied Materials (AMAT - Get Report) are still soaring following the company's all-stock deal to merge with Tokyo Electron.

What this means is Applied Materials, which is the world's largest chip equipment maker with a $21 billion market cap, is joining forces with the world's third-largest sector rival with an estimated market cap of $10 billion.

The question is what exactly did Applied Materials accomplish with this deal?

Given the level of business erosion through which Applied Materials has suffered, including a 16% revenue decline in the August quarter, picking off Tokyo Electron makes sense on many levels. Still, while the stock has done well, up more than 50% for the year to date, I haven't seen the sort of outperformance needed from Applied Materials that would support such investor optimism.

The company already generates roughly 70% of its business from such areas as China, Japan and Taiwan, among others. It is clear management wants to secure its market position in those regions. My issue, however, is this deal does not address pressing concerns about system orders, which have been on the decline in the trailing 12 months.

Plus, with weak financial results coming out from smaller players including Ultratech (UTEK) and MKS Instruments (MKSI), there are no signs that the next order cycle, or for that matter the next several cycles, will show much (if any) improvement.

Granted, things have been "less bad" of late. But let's not forget that in the August quarter Applied Materials posted a 12% sequential decline in system orders, of which there was a 50% decline in the all-important foundry business, leading to a 23% year-over-year decline in net income. A case can be made that Applied Materials is beginning to lose share to nimbler rivals such as Lam Research (LRCX), which has consistently grown both revenue and profits.

To that end, Applied Materials investors who are now bidding up these shares solely on the basis on this deal don't fully understanding the risks that remain here. Not only does the company has to execute to synergize both operations, but Lam Research and Ultratech are just not going to sit idle and allow Applied Materials to sort things out. When you consider that the company just installed a new CEO in Gary Dickerson, the uncertainties begin to pile up.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
AMAT $21.80 0.00%
AAPL $130.28 0.00%
FB $81.53 0.00%
GOOG $565.06 0.00%
TSLA $218.42 0.00%

Markets

DOW 18,080.14 +21.45 0.12%
S&P 500 2,117.69 +4.76 0.23%
NASDAQ 5,092.0850 +36.0220 0.71%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs