I'm not suggesting that shareholders should immediately bail on the stock. But I do think it's a mistake to completely dismiss some of these factors, including a possible language barrier that may slow some merger processes. Along those lines, I don't believe that management has shown enough interest to grow its U.S. business, which accounts for less than 20% of the company's sales and may fall further once this deal closes.
In fairness, I don't want to completely discount some of the possible benefits. As a value investor, I place a strong emphasis on the bottom line. So it's also encouraging that, according to recent estimates, the combined companies are expected to save roughly $500 million per year in operating expenses. Without question, the lowered capital expenditures should help bolster the bottom line.
It's also a strong positive sign that management has already committed to buying back $3 billion worth of the company's stock once the Tokyo Electron transaction is final. But again, these are temporary fixes. I'm more interested in seeing if Applied Materials can get back to growing revenue and profits on an organic basis.
While the CEO change and bringing on Tokyo Electron may have served as near-term catalysts for the recent stock hike, I think investors need to pause here and study everything that is going on. Ultimately, it will be higher orders and shipments that will drive this stock.
Unfortunately, as shown by the foundry order reduction, most if not all of the revenue growth on which Applied Materials relies is predicated on semiconductor capital spending. In this sector, that's not something Applied Materials or any other company, can control.
Until revenue and profits begin to show meaningful organic growth, I would take my profits now and wait for a lower entry point.
At the time of publication, the author held no position in any of the stocks mentioned
This article was written by an independent contributor, separate from TheStreet's regular news coverage.