Shares of Applied Materials Inc. (NASDAQ: AMAT) peaked at six-week highs this past Tuesday, extending a solid relief rally that began at the start of June. While the stock has been choppy as of late, its gains have far exceeded fellow semiconductor companies struggling to escape the shadow of a prolonged U.S.-China trade war.

 

AMAT Summary

  • Market Cap: $38.7 billion
  • Annual Revenue Growth: 18.7% (October 2018)
  • Free Cash Flow: $3.165 billion
  • Stock Performance: +26% (YTD)

Why is AMD Outperforming the Market?

Applied Materials has been riding high for much of 2019, benefiting from a broad market rally that touched virtually every sector of the stock market. But the semiconductor giant has managed to outperform its industry peers thanks to stronger than expected quarterly earnings and solid guidance.

During its most recent quarter, the company made $0.70 in adjusted per-share earnings on $3.53 billion in revenue. While both figures were well below year-ago levels, they exceeded analysts’ forecasts.

The company’s guidance also reassured investors that growth beyond the core smartphone segment was not only possible but highly likely. In the current fiscal quarter, Applied Materials expects to generate $3.525 billion in revenue, which would translate into per-share earnings of between $0.67 and $0.75.

New growth drivers tied to cloud computing, 5G networks, and the ever-present Internet of Things all bode well for the semiconductor giant.

And while the U.S.-China trade war is having a direct impact on the company’s business, mainland China doesn’t have any comparable players that can produce the types of integrated circuits Applied offers. Nevertheless, Applied’s chief executive Gary Dickerson recently warned that “the strained relationship between China and the U.S. can put decades of economic growth at risk.”

Based on Zacks’ earnings estimates, Applied Materials is currently ranked tenth among 637 individual stocks listed in the computer and technology sector. The high ranking is due to strong full-year earnings expectations.

 

AMAT vs. Semiconductors

Applied Materials peaked near $45 a share back in April, the highest since August. AMAT has since fallen back to the $41-$42 range but is still up more than 26% year-to-date. The stock has recovered more than 41% from the December swing low when the S&P 500 and Nasdaq briefly entered into bear markets.

Applied Materials Share Price 1 Year - Jun 13 2019

Source: Yahoo Finance

The S&P 500’s semiconductor industry has returned double digits so far in 2019, but is still trailing the large-cap index in terms of gains. At 12.3%, semiconductor stocks have returned less than half of what Applied Materials has managed to put up through the first five-and-a-half months of 2019.

AMAT has also outperformed Zacks’ much broader computer and technology sector, which has returned an average of 15.5% this year.

 

Conclusion

Applied Materials isn’t immune to the U.S.-China trade war, but its position in the dynamic chip sector gives it a strategic advantage over its rivals. Applied is currently the world’s largest chip equipment provider and isn’t easily replaceable in markets such as China.

Disclaimer: Author holds no investment position in Applied Materials at the Time of Writing.