Applied Mat. Q3 Forecast Disappoints, Stock Drops 1.5%

Applied Materials' Q3 forecast disappoints despite beating Wall Street estimates, shares drop 1.5% after a 32% rally.

By Barry Stearns

5/16, 16:55 EDT
Applied Materials, Inc.
Intel Corporation
Taiwan Semiconductor Manufacturing Company Ltd.

Key Takeaway

  • Applied Materials' Q3 sales forecast of $6.65 billion and EPS range of $1.83-$2.19 fell short of high analyst expectations, causing a 1.5% stock drop post-announcement.
  • The company's performance is a key industry indicator, with growing demand for AI chip production machinery but a pause in orders from ICAPS sectors.
  • Geopolitical concerns and heavy reliance on the Chinese market, accounting for 43% of revenue, pose risks amidst U.S.-China tensions and regulatory scrutiny.

Forecast Fails to Impress

Applied Materials Inc., a leading provider of chipmaking machinery in the United States, presented its fiscal third-quarter sales forecast, which, despite surpassing the average Wall Street estimate with a projection of roughly $6.65 billion, fell short of some analysts' expectations of up to $7.13 billion. The company's anticipated profit, excluding certain items, is set between $1.83 to $2.19 a share for the period ending in July, against analysts' expectations of $1.98 a share. This announcement came after a significant rally in the company's shares earlier this year, which saw a 32% increase, closing at $214.17 in New York on Thursday before the forecast was released. However, the shares experienced a 1.5% drop in extended trading following the announcement.

Industry Indicator

As a major supplier to some of the largest manufacturers in the semiconductor industry, including Taiwan Semiconductor Manufacturing Co., Samsung Electronics Co., and Intel Corp., Applied Materials' performance and outlook are closely watched for signs of demand trends within the crucial electronics supply chain. The company's projections and current performance are thus seen as key indicators of the health and direction of the broader chip industry, particularly at a time when investors are keenly looking for evidence of a recovery in the sector.

Demand Dynamics

Applied Materials reported a growing demand for machinery used in the production of artificial intelligence (AI) processors, highlighting the increasing importance of AI-related chips. CEO Gary Dickerson expressed a strong bullish stance on the prospects for AI chips, predicting that they will soon surpass the smartphone and personal computer sectors in silicon consumption. However, the company noted a pause in orders from customers producing semiconductors for internet-connected appliances, communications, automotive, as well as power and sensors (ICAPS), attributing the pause to these customers installing previously purchased machinery. Dickerson remarked, "Near term, there will be some digestion," indicating that significant growth for the company is not anticipated within the year.

Geopolitical Concerns and China's Role

China represents a significant portion of Applied Materials' revenue, accounting for 43% in the last quarter. The company has benefited from substantial investments by Chinese firms aiming to achieve greater self-reliance in semiconductor production. Despite restrictions from the U.S. and the European Union on supplying advanced manufacturing gear to China, there has been a surge in orders for equipment used to make simpler chips. This dependency on the Chinese market has raised investor concerns about potential impacts from geopolitical tensions. Additionally, Applied Materials' dealings with China's largest chipmaker, Semiconductor Manufacturing International Corp., have come under investigation by the Justice Department, though the company has stated it is cooperating with the inquiry. CEO Dickerson expressed optimism about China's resilience but cautioned that the growth rates seen in recent years are unlikely to continue.

Management Quotes

  • Gary Dickerson, CEO of Applied Materials:

    "Near term, there will be some digestion. This year is not going to be significant growth year for us." "I’m extremely bullish about the prospects for AI-related chips and am predicting that such processors will soon overtake the smartphone and personal computer industries in terms of the amount of silicon consumed." "We see China staying resilient... you’re not going see the growth rate you’ve seen over the last couple of years."