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Politics : Formerly About Applied Materials -- Ignore unavailable to you. Want to Upgrade?

To: Jacob Snyder who wrote (45676)	4/20/2001 10:03:57 PM
From: brunn	Read Replies (2) \| Respond to of 70976

AMAT is overvalued at these prices. My intention was not to sound too bearish on AMAT--long-term I am bullish on it as I suspect most posters here are. One could argue that if I am bullish long-term it would be illogical for me to believe that AMAT is overvalued now. I guess it comes down to perspective--over a 2-5 year horizon, AMAT is still probably a good investment, over the next few months it appears rather risky. The truth is that I may be peeved at how the market has once again foiled my attempts to predict it--I really was planning on buying a lot more shares of this stock about now, only at half this price. I sure did not expect to be considering selling. But if AMAT goes much higher it will reach a valuation more associated with peak business conditions than the present difficult business conditions. Another way to look at its valuation: the stock peaked at 26 in 1997 before falling to 11 with peak earnings reaching 30 cents per share per quarter. Since AMAT's earnings peaked with this cycle at 77 cents, a comparable peak valuation would be 67. (26/30 X 77=67.) Buying today is similar to buying at the peak in 1997 as we were about to fall off a cliff with a >50% dive during the Asian Crisis. If you do the same math for the 1995 peak and you will find that we are actually at a valuation of 33% above peak valuation in 1995. Buying today is like buying at 20 in 1995 in which case you would have had to wait 4 years before seeing a significant return on investment. The 3 best explanations for this valuation anomaly (beyond the recent runup due to the NASDAQ's rebound from oversold levels): 1. Forced buying by tech investors (e.g.all those new tech mutual funds) who now fear the cyclicality of Cisco/Nortel more than that of AMAT. 2. Better understanding of the AMAT cycle. A true cyclical company should have peak valuation in terms of P/E (or else negative) at the bottom and the P/E should fall as business improves and the inevitable downturn approaches. AMAT's P/E however has had a tendency to increase as the price increases. I guess tech investors have had difficulty controlling their greed as well as people who invest in General Motors do. AMAT's valuation has held up with this downturn perhaps because their is a better understanding that the best way to make money in the past was to buy when business is at its worst. The point of my previous message is that just as we might enjoy unusually high levels now, we might have to ratchet down our expectations of gains down the road. If people are buying now because they better understand that they should buy at the bottom they may also better understand how quickly and unexpectedly things can fall apart and will be anxious to sell sooner. 3. Perception that AMAT's customers will be forced to invest in new technologies of Copper, 300mm, etc. despite business conditions. This is the rosiest explanation as it portends fundamental improvement in earnings rather than market-related factors. In any event, if this is the bottom for AMAT's business, people buying today are entering at a far higher valuation than previous bottoms and they should be prepared for a lower return than we've seen from previous bottoms. If this does not turn out to be the bottom and orders do not show evidence of improving in the summer (which, by the way, is traditionally the slowest time of the year for their business), today's prices should be unsustainable. Then again, trying to predict anything with this stock is maddening--who would have predicted it would increase 50% year to date in the face of what has happened to the NASDAQ?