Reaching Into The Silicon Abyss

To get a fix on the damage to technology issues during the deep slump, look at Applied Materials (AMAT), the world's No.1 maker of wafer-fabrication gear for the semiconductor industry. In 11 months, it lost 62% of its value--falling from 59 7/8 on Aug. 16, 1995, to 22 5/8 on July 23, 1996. Who would look at this loser? Some savvy tech watchers are--and they're happily buying.

One such pro is Mike Murphy, editor of California Technology Stock Letter, who says strong semiconductor demand had kept the price too high. "We've waited a long time to snag this great growth stock," he says. "Now, the Street's obsession with the short term gives us a chance to pick it up cheap."

Applied is cheap by any measure, explains Murphy. It's priced at 1994 levels--although sales and profits have doubled. The only "real risk in buying now is that we may be too early," he says. But the "dynamics are in place for equipment orders to hold up," he adds.


He figures the price will climb to 40 by early next year and to 55 by the end of 1997. It's true, he says, that DRAM producers overdid capacity in 1995, which resulted in a glut of chips and depressed prices: A 4-megabyte chip plunged from $18 last August to $3, and a 16-mb went from $55 in December to below $10.

But "the risk is in time, not in price," explains Murphy. He thinks demand for semiconductor equipment will pick up sooner than the Street expects. Microprocessor sales, he notes, are driven by personal computers, and PC sales will be driven by cheap DRAM prices, helped by the urge to upgrade PCs to Microsoft's Windows NT. "So to me, Applied should be a core holding in technology," argues Murphy.

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