Applied Materials (AMAT) enjoyed yet another positive day during Wednesday's trading, building on a productive week for the company.
The stock rose 0.6% to $34.96 at market close on Wednesday, building on a 4% gain on Tuesday, indicating the early stages of growth after losing double digits so far this year.
As a classic cyclical stock, concerns over the cycle and worries over macro factors may be taking a back seat to fundamentals and demand indicators.
Some investors are confident in a recovery in share prices across the semiconductor sector as fear over tariffs and memory pricing have prematurely pushed prices down.
Andrew Schmeidler, Partner at ARS Investment Partners, told Real Money that the market has oversold the cyclical semiconductor sector overall.
His firm oversees a total of $1.1 billion in assets, including 528,057 shares of Applied Materials, 1.5 million shares of Cypress Semiconductors (CY) , 334,787 shares of Micron Technology (MU) , 73,150 shares of Broadcom (AVGO) , 51,250 shares of Advanced Micro Devices AMD, 45,449 shares of Lam Research (LRCX) and 9,105 shares of ASML Holding NV (ASMLF) .
"These have really gotten oversold based on the idea that the cycle is over," he said. "The earnings releases [from semiconductor companies] are not going to be nearly as bad as the recent price declines suggest."
The recent results of his holdings in ASML and Lam Research certainly help vindicate his outlook as both cruised past expectations on their way to share recovery after months of decline from March highs.
He suggested that the over-reliance on ETFs and algorithmic trading have made the market lose sight of fundamentals and valuations.
"For people who are looking past the price, these market swings can be seen as real opportunities," he said.
He added that, historically, the fourth quarter is positive for the cyclical and often seasonal semiconductor industry.
His outlook is buoyed by the fact that the institutional investment community seems to be changing its tune on some of the semiconductor names that have been sold off in droves since the beginning of the year.
Applying the Takeaway to Applied Materials
The sentiment from Schmeidler was echoed by analysts on Wall Street, who applied his take specifically to Applied Materials.
"We believe the current semiconductor capital spending environment is in the midst of expansion," J.P. Morgan analyst Harlan Sur wrote in a note on Monday.
He explained that he and his team believe AMAT is set to run for a few years as the cycle turns positive again.
"Equipment stocks are down 30-45% since the peak in March which is a similar magnitude to the 2012/2013 and 2015/2016 down cycles, and suggests limited downside from current levels," Sur explained. "The market is already discounting a significant decline in equipment spending next year."
He ran down a laundry list of factors that could lift AMAT shares in the long term
"We believe a combination of market share gain, incremental revenue opportunity, broader product portfolio, increased penetration with existing customers, increased wafer capital intensity at foundry/logic/memory, and exposure to the fast-growing display market will drive growth for AMAT over the next two to three years," Sur noted.
Sur declared that the pushing down of the share price was the result of an overreaction by the market this year on pricing concerns.
The concerns on pricing have stoked bearish outlooks as technology intelligence provider DRAMeXchange expects the quotations of DRAM products to decline by 5% or more in the fourth quarter 2018, "terminating the super cycle of price growth for nine consecutive quarters."
While a valid concern, the market has overreacted in Sur's view.
"Memory pricing and limited visibility has fueled bear expectations, but semi stocks have been overly punished, in our view," he concluded.
He set a $63 price target for the stock, nearly twice the stock's value at the start of the week.
To be sure, it was not all roses for Applied Materials in particular on Wednesday.
Real Money's technical analyst Bruce Kamich said that the momentum signals on the stock are "definitely not constructive."
Morgan Stanley analysts agreed with Kamich's more bearish outlook, disagreeing with J.P. Morgan's Sur.
Equity analyst Craig Hettenbach said that semiconductors broadly are "by no means out of the woods."
He argued that the downcycle running into 2019 could be worse than the downcycle in 2015, meaning that the market has not yet priced in all of the fall to come.
"There has been greater excess built up in the supply chain in the current cycle relative to 2015," he explained. "Any trading bounces will probably offer better opportunities to further reduce exposure [to semiconductor stocks]."
He said that given this build-up 2019 could be a down year for a company like Applied Materials that is so integral to that supply chain.
"As we think about 2019 for memory, we would expect substantially more contraction than we saw in the 2015/16 period," he said, "For one thing, both commodities are in clear oversupply, with material under-shipment relative to product in evidence for both."
Cyclical semiconductor stocks like Applied Materials, Lam Research, and ASML Holding all had great days on the back of a glimpse at recovery as earnings won over analyst pessimism.
For analysts cognizant of the upsides that risks that both Kamich and Morgan Stanley present and willing to dig into the fundamentals that Schmeidler points out, a play on semiconductors this earnings season presents an interesting opportunity.