Time To Sell Applied Materials Stock?

Up more than 2x since March, we believe Applied Materials stock (NASDAQ: AMAT) could see significant downside. Applied Materials is a semiconductor fabrication equipment and display device manufacturer, whose stock trades at $86 currently and is, in fact, up 41% so far this year. It traded at $67 in February 2020 – just before the outbreak of coronavirus – and is currently 28% above that level as well. Further, with semiconductor demand is still not back up to pre-Covid levels, demand for the company’s products will remain low in the near to medium term, and the stock has the potential to drop around 20% to its pre-Covid levels. Our conclusion is based on our comparative analysis of AMAT stock performance during the current crisis with that during the 2008 recession in our interactive dashboard.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

• 12/12/2019: Coronavirus cases first reported in China
• 1/31/2020: WHO declares a global health emergency.
• 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
• 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
• Since 3/24/2020: S&P 500 recovers 65% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here is how AMAT stock and the broader market fared during the 2007-08 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

AMAT and S&P 500 Performance Over 2007-08 Financial Crisis

We see AMAT stock declined from levels of around $21 in September 2007 (pre-crisis peak) to levels of around $9 in March 2009 (as the markets bottomed out), implying AMAT stock lost 56% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of just under $14 in early 2010, rising by 51% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied to levels of 1,124, rising by about 48% between March 2009 and January 2010.

AMAT Fundamentals Over Recent Years

AMAT revenues increased from $10.8 billion in 2016 to $17.2 billion in 2020 (AMAT’s fiscal year ends in October), primarily due to higher revenue from the semiconductor fabrications segment. Along with higher revenue, earnings also increased from $1.56 to $3.95 during this period.

Does AMAT Have Enough Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

AMAT’s total debt rose marginally from $5.3 billion in 2017 to $5.4 billion in 2020, while its total cash decreased from around $7.3 billion to $5.7 billion over the same period. Further, the company generated almost $4 billion cash from operations in fiscal 2020. Strong cash from operations provides the company a reasonable cushion to deal with the current crisis.

Conclusion

Phases of Covid-19 Crisis:

• Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
• Late-March 2020 onward: Social distancing measures + lockdowns
• April 2020: Fed stimulus suppresses near-term survival anxiety
• May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
• July-November 2020: Weak Q2 and Q3 results, but continued improvement in demand and progress with vaccine development buoy market sentiment

With the recent surge in the number of new Covid-19 cases in the U.S., we see demand from the broader semiconductor sector staying weak in the near term. Further, the company’s Applied Global Services segment, which provides semiconductor manufacturing consulting services, could also see a temporary slowdown as clients are looking to cut down costs to ride out the current crisis. We believe that Applied Materials stock has some potential downside in the near term, and even as the lockdowns are gradually lifted, a quick turnaround in semiconductor demand does not seem very likely. This could see AMAT stock potentially drop 20% from its current level.

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