Shares of Applied Materials (NASDAQ:AMAT | AMAT Price Prediction) have been wobbling alongside the broad semiconductor scene of late. Even for those who were waiting around for a dip, it feels a bit unnerving to step in as a buyer at a time like this, with the chart looking toppy and bears, like Dr. Michael Burry of The Big Short fame, stepping up to the plate, announcing shorts against the firm.
Of course, for a recent parabolic mover like Applied Materials, an equally steep correction is not only to be expected; it’s a healthy sign that might prevent any sort of AI bubble from getting too, well, bubbly. Any way you look at it, the chart of Applied Materials certainly looks to be one of the scariest in all of the semi scene. And while it seems reckless to try and reach out to catch the falling knife, I do think that a 32% discount to all-time highs is tempting, especially if you were more than willing to buy shares of the semiconductor equipment supplier.
Indeed, the semiconductor designers pay the fabs, which pay the equipment makers, which pay the suppliers, just like Applied Materials. And while there are reasons to go all the way back in the chain, given that firms like Applied Materials tend to boom before firms further down the line do, especially as foundries ramp up production to meet unprecedented demand for AI chips, I do think that the magnitude of cyclicality is to be taken into account.
The risks of betting on the equipment suppliers
By going for the equipment makers of the equipment makers, the booms are going to be more vicious (think the parabolic rally that preceded the latest bear market plunge), but so too will the busts once the cycle turns.
Indeed, that’s pretty much the bullwhip effect to watch out for and, in the case of Applied Materials, the fear is that investors who get in at the wrong time or too close to the peak in the cycle might be the ones left with a bad case of whiplash.
While Dr. Burry’s short is something to think about, especially given the high-risk/high-reward nature of equipment vendors that stand to be paid first at the cusp of an industry ramp, I do think that the stock has already crashed.
A 40% cratering from peak to trough isn’t anything mild, even though it seems like it given the parabolic rally going into the steep drop. In my humble opinion, it’s hard to say that the cycle’s peak is in, especially when you consider the potential for foundries to keep on buying equipment, which, in turn, means more supplies needed for the equipment makers themselves. There’s a ton of CapEx being spent on the effort, and it’s finding its way to the equipment suppliers like Applied Materials.
The smart money has already booked profits
I guess we’ll need to wait and see who else in the smart money crowd has been buying the dip. With a barrage of hedge funds (more than a dozen) selling the stock in the second quarter (great timing, by the way), I wouldn’t look to rush an entry, especially since the shares have still more than tripled in the past year, even with that latest correction.
With upbeat guidance and the wind at the firm’s back, it feels like Applied Materials is being punished by the market for no good reason.
Perhaps there doesn’t need to be a reason to take some profits, even if you’re in the belief that the peak in the cycle is years away and that the latest dip is nothing more than a healthy correction. At around 30.0 times forward price-to-earnings (P/E), the name looks modestly priced, but I’m not a buyer, at least not while Dr. Burry bets against the firm and investors look beyond the semis.
With a foundry ramp underway, though, it’s hard to tell just how much of the boom is already priced in. While this probably isn’t it for the demand boom, I wouldn’t look to brave extreme negative momentum unless, of course, you’ve got a long-term horizon and a stomach for extra choppiness. For now, I’ll wait for a more vicious semi drawdown before looking to enter. Perhaps pressure on the top AI labs could cap hyperscaler CapEx and reduce the flows going through the semis.
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