AMAT Earnings Preview- A key read into the semiconductor industry
Applied Materials (AMAT) is set to report its Q3 earnings on August 15, after the market close. Analysts expect the company to post earnings per share (EPS) of $2.03 and revenue of $6.68 billion, according to FactSet. AMAT, a global leader in materials engineering solutions, specializes in providing equipment, services, and software that enable the manufacturing of semiconductors and display technologies. As a critical player in the semiconductor industry, AMAT’s results are closely watched as they provide insight into the health of the broader semiconductor market.
Analysts have mixed expectations heading into the earnings report. On the positive side, AMAT has demonstrated strong performance in its Applied Global Services segment, driven by increased demand for long-term service agreements and 200mm generation equipment. Additionally, the Display and Adjacent Markets segment has seen a boost in revenue due to higher investments in display manufacturing equipment for IT products. The company also maintains a robust cash position, with $10.5 billion in cash, cash equivalents, and investments, providing financial flexibility for further growth and shareholder returns. Furthermore, AMAT has been actively repurchasing shares, which is expected to continue supporting EPS growth.
However, there are also concerns that could weigh on the company's results. The Semiconductor Systems segment has experienced slower revenue growth due to reduced customer demand, which may affect overall performance. Additionally, AMAT is grappling with ongoing supply chain constraints, which could lead to excess or obsolete inventory, posing a risk to margins. Moreover, the company recently faced a setback when its application for funding under the CHIPS Act for a research and development center in Silicon Valley was rejected by the Commerce Department. This could impact its longer-term innovation and growth prospects.
Another area of concern is AMAT's exposure to the Chinese market. While AMAT benefited from strong demand in China over the past two years, the outlook for China has turned less favorable. The company’s DRAM revenue from China was artificially inflated by about $500 million as Chinese manufacturers ramped up orders ahead of U.S. export restrictions. This boost is expected to evaporate in the coming quarters, potentially leading to a significant drop in revenue. Additionally, the utilization rate for China’s ICAPS market, a key growth area for AMAT, has fallen to the mid-70s, indicating potential weakness ahead.
Analysts like Cantor and Stifel have adjusted their expectations for AMAT in response to these dynamics. Cantor, for example, sees AMAT’s calendar year 2024 EPS tracking slightly above consensus at $8.63, with potential upside to $8.75. However, they have reduced their price target from $290 to $250, reflecting a lower multiple due to recent re-rating in the semiconductor sector. Similarly, Stifel has raised its price target for AMAT to $275, citing optimism about future wafer fabrication equipment (WFE) spending, but also expressing some caution regarding the broader market’s pacing.
In summary, while AMAT is expected to deliver solid Q3 results, there are several headwinds that could temper its outlook, particularly in relation to China and ongoing supply chain challenges. Investors will be closely watching the company’s guidance for Q4 and beyond, as well as any updates on how AMAT plans to navigate the shifting landscape in the semiconductor industry. Despite these challenges, the company’s strong cash position and continued focus on innovation could provide some cushion against these risks, making it a key player to watch in the upcoming earnings season.