There’s no mystery why Dr. Michael Burry is so bearish on the semi trade. It’s overheated, and if you think AI is in a bubble, it just makes sense to bet against the broad basket. With an individual bearish position in Applied Materials (NASDAQ:AMAT | AMAT Price Prediction), though, questions linger as to whether there’s more pain to be had in the individual name targeted by the great Michael Burry.
Undoubtedly, the company is catching a lift by offering tools for the memory chip makers. Arguably, it’s the supplies behind the manufacturers that add a degree of cyclicality to the equation.
Dr. Burry’s targeted bet against semis
Indeed, if you’re going to bet against the memory chip trade itself, which has been one of the most overheated parts of the semi industry this year, it makes sense to take a step back and target the firms providing the materials necessary for its production. With shares now down 26% from their peak after going parabolic, it’s evident that the stock chart was a tad overly aggressive going into the early summer.
At 52.9 times trailing price-to-earnings (P/E), the stock looks incredibly expensive. In short, if you don’t like the semi trade (and the single-digit P/E multiples popping up), you’ll probably hate Applied Materials shares. So, is the company anything more than a canary in the coal mine?
Or is there a blind spot that Michael Burry might be missing as memory makers look to ramp up production?
Dr. Burry has his reasons for being bearish
In my view, I’d much rather be in the memory makers themselves than take a step back while paying a higher price of admission. What concerns me most about Applied Materials is what could happen if China doubles down on domestic toolmakers and the magnitude of pain that could be in the cards if memory maker CapEx has been pulled forward too aggressively.
When it comes to Micron (NASDAQ:MU), it’s actually spending quite a heavy sum on expanding tools and capacity. But, at the same time, it’s not exactly pouring every dollar into it by risking its credit rating by going deep into debt — something that might cushion the memory maker from the blow as a firm like Applied Materials experiences a big drop in tool orders.
In short, I get why Dr. Burry is betting against the firm and wouldn’t venture to go long myself, at least not at these valuations.
The bottom line
Sometimes it’s just best not to play by going long or short, given the high stakes on both sides. Much of that CapEx is going to find its way into Applied Materials’ pockets, but, at the same time, once it drops, shares of the firm could be in a far more vulnerable spot. At this juncture, shares look expensive.
Perhaps not short-worthy expensive, but the way I see it, I’d rather just own Micron to play memory. The picks and shovels behind the picks and shovels play isn’t always the best bet, at least in my view, especially when there are doubts about where we are in the cycle.
If the memory boom is structural, Applied Materials could justify its steep price of admission. But, then again, if it’s not, the downside could be significant. The risk/reward profile is different compared to the memory makers themselves, and, in my view, I’m not as big a fan of it.
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