This manufacturing company is a cash-generating machine

If you’re worried about cyclicality or want exposure to chip manufacturing, Applied materials (AMAT -3.75% ) can be a great stock to buy right now. In this crazy live excerpt from “Semiconductor Revolution”, recorded on February 17Motley Fool contributors Nicholas Rossolillo and Danny Vena explain why investors should consider this highly profitable venture.

Nicholas Rossolillo: Yeah, applied materials. It’s interesting because we think of the semiconductor industry, we have several elements of it. You have the semiconductor design. You have the actual manufacturing. But in between, you have to have those companies that make the equipment to make semiconductors. Applied Materials is therefore measured by market capitalization. They are one of the biggest in space. They make all kinds of machinery and equipment to help chip makers make semiconductors. Obviously, we can expect them to see pretty high growth numbers right now due to the shortage of chips. This is absolutely what we saw yesterday when updating their results. Turnover up 21% compared to a year ago. Adjusted earnings per share up 36%, almost double free cash flow. This is my favorite benchmark measure for profitability. It’s just a money making machine. The space has really consolidated down to a few players like Research is another. The applied materials are mentioned alongside. A few weeks ago, I think we talked about a company called Axcelis Technologies. They are very, very small, they only like one thing. Applied Materials does a lot of things. This is a very good indicator for the whole chip industry.

If you’re worried about cyclicality or want to expose yourself a bit to chipmaking, like this Intel trying to double down right now with the Tower acquisition that Danny talked about earlier, I like Applied Materials a lot more because you’re going to get all that exposure in a business that’s going to be less cyclical and is really, really very profitable . Again, returning to that long-term outlook for a decade or more, the CEO on the earnings call said yesterday: “Our outlook for the next decade is very positive. with outsized opportunities for Applied Materials.” Again, going back to this long-term trend, there will be cycles along the way. But the chip industry is a long-term, secular growth trend. Applied Materials is a great way to bet on the whole industry I think because you don’t have to try to pick the winner, they supply all kinds of companies with equipment so it’s a cool company.

Jose Najarro: Danny, any thoughts on Applied? Is it a company you monitor or follow?

Danny Vena: Not a company I followed, but I certainly agree with the sentiment. It’s a kind of game of picks and shovels. Although you are not necessarily investing in the manufacturer itself, you are investing in the supplier of the manufacturer. I think it can definitely be a way to hedge your bets rather than having to buy a whole basket of semiconductor stocks. Maybe you buy something like Applied Materials where you get exposure to all the companies they supply.

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