Applied Materials, Inc. (Nasdaq: AMAT) is an American semiconductor company that provides equipment, services and software for the production of semiconductor chips for electronics, computers, smartphones, televisions and solar-based productions. Its headquarters are in San Diego, California.
Applied Material delivered better-than-expected results for the third quarter, pushing shares down 3% in early trading. Adjusted earnings per share were up 2%, while sales were up 5%.
The board states the following:
“Memory spending is expected to be lower than 2022 as macro uncertainty and weakness in consumer electronics and PCs cause these customers to delay some capacity expansions,” CEO Gary Dickerson told investors in a conference call late Thursday. “
“Leading foundry logic looks strong with customers vying for leadership and racing to be the first to implement key technology inflections (and) ICAPS customers serving IoT, communications, automotive, power and sensor markets report strong and weak points, “
Applied Materials revenue is expected to grow 15% for the fiscal year, and management currently expects demand in 2023 to likely decline from 2022 as macro uncertainty and lower demand for memory-based products are expected to weigh in. on the question. On the other hand, the leading foundry logic division continues to look strong. Demand is also expected to increase from the IoT division, from the communications, automotive, power and sensors markets.
The biggest risk remains the consumer-oriented market, as demand for PCs and smartphones remains weak. Most semiconductor manufacturers, including Samsung Electronics (OTCPK: SSNLF) and Taiwan Semiconductor Manufacturing (NYSE: TSM) have all reduced their capital expenditures in recent times.
The company’s valuation remains relatively subdued, as the stock trades at a 14x P/E ratio. While 12x forward gains are quite cheap, the cyclical nature of the semiconductor industry will worry investors and the stock is likely to remain muted for a while. But debt to equity remains quite low at 0.47, which is positive given recent capital expenditures.
Excess stock will remain an issue until 2023 as new fabs hit the market. An important factor is the significant new capacity entering the market from different sources. According to research from IDC, “Overall, the semiconductor industry remains on track to achieve another healthy year of growth as the supercycle that started in 2020 continues this year,” according to IDC. Mario Morales, group vice president, Semiconductors at IDC. “The financial and systems markets remain closely focused on shortages in specific sectors of the supply chain, but what is more important to highlight is how critical semiconductors are for each major system category and the growth in semiconductor content that will continue unabated over the next five to seven years. continues.”
The biggest problem remains the mixed signal that the market is sending. Semiconductors have gone through a number of cycles in the past, causing the semiconductor stocks to drop significantly. And again, problems are slowly beginning to appear in the industry. Major semiconductor manufacturers have recently warned that another downcycle may be on the way.
Despite the potential for hiccups, Applied Material’s business remains relatively strong and the company produced operating cash flow of $1.47 billion for the quarter and returned most of the money to investors. To date, Applied Materials has generated free cash flow of $4 billion. The company’s operating margins remain healthy at 32% and profit margins are around 27%, which should help the company maintain operational efficiency and remain solvent during a down cycle.
The stock’s technical stock remains strong with open interest currently standing at 0.98, which would indicate that the market remains relatively neutral on the stock. Meanwhile, the RSI-14 remains relatively subdued around 50, indicating that the stock is not overbought or oversold.
Overall, Applied Materials remains a stock likely to be closely watched by investors as close to a canary in the coal mine, as we could be heading for a fortune reversal for semiconductor manufacturers.