AMAT tops expectations; Provides in line guidance, can stock rally to 50-day MA?

Applied Materials (AMAT) delivered a strong Q3 FY2024 performance, surpassing both revenue and earnings per share (EPS) consensus estimates. The company reported adjusted EPS of $2.12, which exceeded the consensus estimate of $2.03 and represented a year-over-year increase from $1.90. Net sales came in at $6.78 billion, up 5.5% year-over-year, beating the consensus estimate of $6.68 billion. These results highlight AMAT’s continued ability to outperform market expectations, driven by strong execution across its key business segments.

Shares of AMAT are seeing a mixed reaction to the results. The top and bottom line beat are providing some relief to market participants but the in line guidance may be viewed as a slight disappointment. The stock hit $171 back on August 5 but rallied back to $209 ahead of the print. Investors will await comments on the conference call but, if the stock can hold above $205, then it should be able to press toward a test at the 50-day moving average ($224).

The Semiconductor Systems segment remains the cornerstone of AMAT’s business, contributing $4.92 billion in net sales, an increase of 5.3% year-over-year, which was slightly above the estimated $4.83 billion. The segment’s operating income also saw a notable improvement, rising to $1.72 billion with an operating margin of 34.8%, up from 33.5% in the prior year. Key drivers within this segment include a strong demand for DRAM, which grew from 17% to 24% of the segment’s revenue, while Foundry, Logic, and Other slightly decreased as a percentage of total revenue. The stable performance in Flash Memory, holding at 4%, further supported the segment’s growth.

The Applied Global Services (AGS) segment also performed well, reporting net sales of $1.58 billion, up 7.9% year-over-year and slightly above the $1.57 billion consensus estimate. Operating income for this segment grew to $467 million, up from $399 million in Q3 FY2023, with an operating margin of 29.6%, improving by 2.3 percentage points. The AGS segment’s robust performance reflects continued demand for maintenance and optimization services across AMAT’s installed base, driven by customers’ focus on maximizing the efficiency of their existing equipment.

In contrast, the Display and Adjacent Markets segment faced more mixed results. Net sales were $251 million, a 6.8% increase year-over-year, slightly exceeding the consensus estimate of $244.2 million. However, the segment’s operating income declined sharply to $16 million, down from $32 million in the previous year, with a significant contraction in operating margin to 6.4%, compared to 13.6% in Q3 FY2023. This decline highlights ongoing challenges in this segment, particularly in maintaining profitability despite the modest revenue growth.

In terms of broader financial metrics, AMAT reported an adjusted gross margin of 47.4%, up from 46.4% in the prior year, and slightly ahead of the 47.1% consensus estimate. The adjusted operating margin also improved to 28.8%, up from 28.3% last year, driven by higher margins in the Semiconductor Systems and AGS segments. Additionally, AMAT generated $2.39 billion in cash from operations, reflecting strong cash flow generation, which allowed the company to return $1.19 billion to shareholders through share repurchases and dividends.

Looking ahead, AMAT provided guidance for Q4 FY2024, projecting net sales in the range of $6.53 billion to $7.33 billion, with adjusted EPS expected to be between $2.00 and $2.36. The midpoint of the EPS guidance slightly surpasses the consensus estimate of $2.15, indicating confidence in continued robust performance. However, the wide guidance range reflects some uncertainty in market conditions, particularly in the Display and Adjacent Markets segment.

Overall, AMAT’s Q3 results underscore its strong position in the semiconductor industry, driven by solid demand across its core segments. While the Display and Adjacent Markets segment faces profitability challenges, the company’s overall performance remains robust, supported by strong execution in Semiconductor Systems and Applied Global Services. The company’s positive guidance for Q4 suggests confidence in its ability to navigate potential market headwinds and continue delivering value to shareholders.