Applied Materials Reports Strong Q4 Earnings, but Faces Challenges in China and Non-AI Chip Demand

Applied Materials beats expectations but modest sales outlook weighs on stock - SiliconANGLE

Applied Materials beats expectations but modest sales outlook weighs on stock Applied Materials Inc. posted higher than anticipated earnings and revenue thanks to increased demand for artificial intelligence chips and electronic devices, but its stock fell as company officials issued a mixed outlook for the current quarter. The maker of semiconductor manufacturing equipment reported earnings before certain costs such as stock compensation of $2.32 per share, far ahead of the analysts' consensus estimate of $2.19. Meanwhile, revenue came in at $7.05 billion, up 5% from a year earlier and above the Street's target of $6.96 billion. All told, the company delivered a net profit of $1.73 billion in the quarter, down from the $2 billion profit it recorded in the year-ago period. However, it was the guidance for the current quarter that set the cat among the pigeons. Analysts were disappointed that the company is only guiding for first quarter revenue of $7.15 billion at the midpoint of its forecast, below the analysts' target of $7.24 billion. On the other hand, the company does at least expect a better profit, forecasting earnings of $2.29 per share, slightly higher than the consensus estimate of $2.27. Applied Materials Chief Executive Gary Dickerson (pictured) said on a conference call that the company is still in a good position to benefit from the industry's bullish view on AI and energy-efficient computing. "As these key drivers of semiconductor innovation continue to grow in importance, the industry's roadmap is becoming increasingly dependent on materials engineering, where Applied is the clear leader," Dickerson insisted. Applied Materials is a supplier of sophisticated chipmaking equipment that's used at the facilities of major chipmakers such as Intel Corp., Samsung Electronics Co. Ltd. and Taiwan Semiconductor Manufacturing Co. Because of this, the company is seen as a key barometer of future demand in the chipmaking industry. Those customers generally order machinery from it well in advance of the opening of new chipmaking factories and upgrades to existing lines, which can take more than a year to outfit for production. During the quarter, Applied Material's semiconductor systems business unit - by far its biggest - delivered revenue of $5.18 billion, up 6% from a year ago. Sales in the global services segment rose 11% to $1.64 billion, while revenue from the much smaller display and adjacent markets unit fell 29% to $211 million. The real concern over Applied Materials stems from its declining revenue in China. There, it reported revenue of $2.14 billion, down 28% from a year ago. Last month, analysts had warned that Applied Materials might be hurt by slowing demand for dynamic random access memory in China, and it has also been impacted by the U.S. government's ongoing demands that chipmaking equipment manufacturers refrain from selling advanced technology to customers in that country. Applied Material's Chinese sales are therefore dwindling, despite the fact that China's domestic chipmaking industry is seeing rapid growth of late. It isn't helped by the fact the U.S. Department's of Justice and Commerce are both investigating the company's dealings in that country. Though it has not yet been accused of any wrongdoing, those investigations reportedly concern violations of the U.S. sanctions on Chinese chipmakers. Shares of Applied Materials fell almost 6% in extended trading, but the stock still remains up just over 13% in the year to date.

Analysts revisit Applied Materials stock price targets after Q4 earnings

Applied Materials shares moved firmly lower in early Friday trading as analysts weighed in on the chip-equipment maker's stronger-than-expected fiscal-fourth-quarter earnings report and what they saw as a muted outlook for non-AI-chip demand heading into next year. Applied Materials (AMAT) is a key player in the AI investment story, as it provides the equipment to produce the chips that power everything from flat-panel TVs to personal computers and smartphones. Hyperscalers such as Google (GOOGL) , Microsoft (MSFT) , Amazon (AMZN) and Meta Platforms (META) are poised to spend hundreds of billions building and training their large-language models. Analysts see part of the investments from these cloud-service providers trickling down to the sectors in which Applied Materials has the strongest hold. But that demand is seen as potentially soft next year as companies allocate spending to AI projects and forecast new investments in areas such as memory and ICaps. These are chips for the internet-of-things, as well as communications, automotive, power and sensors applications. Applied Materials sees current-quarter earnings in the region of $7.15 billion, with a margin for error of $400 million. The forecast fell modestly short of Wall Street forecasts and clouded the group's stronger-than-expected Q4 report. Concern about China sales at AMAT So did concern that export restrictions on high-end technology to China from a new Trump administration would weigh on sales in the region, which not long ago accounted for around 45% of overall revenue. China sales were pegged at around 30% of revenue over the three months ended in October, a level the group sees maintaining over the final months of calendar 2024. Chief Executive Gary Dickerson remained focused, however, on the group's ability to develop so-called inflections, which are key changes to chipmaking processes that improve power and efficiency and boost profit margins. That could be why the group's profit outlook for the quarter, around $2.29 a share, topped Wall Street forecasts. Related: Analysts revise Nvidia stock price targets as supply players update outlook "There's a lot of really great inflections that provide a tailwind for Applied," he added during a conference call with investors late Thursday. "And we're bringing enabling technology to our customers in a number of different markets. So, one thing that is also a tailwind for us is pricing improvement as we're shipping more valuable products." KeyBanc Capital Markets analyst Steve Barger, who carries a sector weight rating on the stock, estimated that sales from a central portion of Applied Materials' so-called Gate All Around transistor could double from the $2.5 billion recorded in the previous fiscal year. The GAA architecture also improves power and efficiency. Trillion-dollar chip market by 2030: AMAT's CFO Applied Materials' outlook for wafer front-end equipment sales, or WFE, machinery that forms the basis of chipmaking, was also a concern for analysts. "We're talking about a $1 trillion semiconductor industry by 2030," finance chief Brice Hill said. "I think that's consistent across most of the industry having that view. And we certainly have that view given the added wafer starts and added capacity across the industry basically every single year.' "So, it's hard to guarantee '25, but I'll just call out that our Q4 was growth year over year," he added. Needham analyst N. Quinn Bolton, who lowered his price target on the stock by $15, to $225 per share following last night's earnings update, sees that as weighing on the stock. More AI Stocks: "Over the longer term, management sees that WFE intensity, propped up by the strong China demand of 18% in 2023, could decline and normalize to around 15%, essentially backing away from their long-standing view that WFE should perform in-line, or outperform, semis," said Bolton. Other price target changes include those of Vivek Arya from Bank of America, who lowered his $10 to $220 a share, and Joe Quatrochi from Wells Fargo, who took his $15 lower to $220. Applied Materials shares were marked 8.2% lower in premarket trading to indicate an opening bell price of $172.11. Related: Veteran fund manager sees world of pain coming for stocks