Technology Stocks

Applied Materials, Inc. (NASDAQ:AMAT) Brings Us to a Very Interesting Question

Applied Materials, Inc. (NASDAQ:AMAT) didn’t offer any real surprises in its Q4 EPS (of $0.97) or revenue growth (at 1.0% to $4.01 bln), both in-line with market expectations. However, the guidance was a big problem.

We mention this right here because the stock closed strong, which may be an enormous signal.

Applied Materials, Inc. (NASDAQ:AMAT) offered an outlook that includes the impact of a recent export restriction – specifically, in late October the U.S. announced it had added Chinese-based Fujian Jinhua Integrated Circuit to its list of banned exporters.

In short, U.S.-based companies are barred from selling products to Fujian without a special license.

Without this, Applied noted it would have guided its semiconductor revenue to be higher sequentially. The company’s semi equipment guidance for Q1 implies annualized WFE in the mid-$40 bln range. It’s important to note that this is about $10 bln higher than in all of the years prior to the current cycle.

Specifically, the company expects revenue to be between $3.56-3.86 bln in the first quarter. Within the outlook, Applied expects silicon systems revenue to be down by about 21% yr/yr, Services revenue to be up by about 7% yr/yr, and Display revenue to be up by about 10% yr/yr. Gross margins are expected around 44.6% and the EPS outlook stands at $0.75-0.83.

That brings us to President Trump’s claims today that he is getting closer to a deal with China. It is not impossible that investors are starting to price in some possibility that AMAT will be forced to alter this guidance if the trade negotiation with China includes a provision that the US unwinds its bans against Chinese companies like Fujian.

Overall, the Global Services business saw revenue growth of 18% to $977 mln and non-GAAP operating margins increased to 29.7%. Applied’s Display group delivered $702 mln in revenue on non-GAAP operating margins of 29.3%.

Despite challenging market conditions in the second half of the year, each of Applied Materials’ major businesses delivered double-digit growth in fiscal 2018. While the company expects market headwinds to continue in the near term, it does not see the large fluctuations that characterized the semiconductor and display equipment industries in the past.

As you know, it has been a rough part of the cycle for the semiconductor space. In recent months, Applied has seen several factors negatively impacting industry spending.

These include elevated macroeconomic risks, global trade tensions and specific to Applied’s industry, and a pullback in memory investments. Overall demand in the server, PC, and mobile markets is weaker than it was earlier in the year and memory prices are softening in the near term.

Additionally, after a long time in development, the first EUV tools are expected to enter volume production in 2019.

To support the initial adoption of EUV, Applied is seeing additional investments in these long lead-time systems in 2018 and 2019, creating share headwinds for Applied during this period.


Tales from the Sell Side

Target cuts: UBS lowers their AMAT tgt to $39 from $43; RBC Capital Mkts lowers their AMAT tgt to $38 from $43; Deutsche Bank lowers their AMAT tgt to $37 from $43; B. Riley FBR lowers their AMAT tgt to $33 from $36; JP Morgan lowers their AMAT tgt to $54 from $63; Wells Fargo lowers their AMAT tgt to $45 from $60; KeyBanc Capital Mkts lowers their AMAT tgt to $56 from $71; Credit Suisse lowers their AMAT tgt to $59 from $73; DA Davidson lowers their AMAT tgt to $55 from $70.

  • Credit Suisse highlighted that AMAT called for a shallow recovery in 2019, and although it expects 1H19 to be better than 2H18, the rebound will be “u-shaped” – which suggests that although F1Q is the likely a trough (firm’s view, mgmt was non-committal), F2Q will not be a significant step up. AMAT’s more subdued guide relative to peers reflects the impact of export controls against JIHCC, which were not captured in earlier reports.
  • Although Wells Fargo thinks investors had expected further downward revisions to AMAT’s forward ests, firm thinks shares are coming under some additional pressure given a lack of visibility into WFE spend bottoming (unwilling to call F1Q19 a bottom; NAND & DRAM spending pressure remains key focus). This compares to AMAT previously (post July quarter) noting that it expected a return to growth in F2Q19-F4Q19. When firm looks at the combined guide / ests for AMAT, Lam, & Tokyo Electron, they think investors could consider a low-20% q/q decline in NAND-related following a ~20% q/q decline in 3Q18 spending levels. They remain positive on AMAT’s long-term positioning to capitalize on key secular trends – e.g., multi-patterning requirements in Foundry and Memory markets, as well as an eventual recovery in Display.
  • AMAT’s F4Q18 results exceeded the Street by +$12.0M, but F1Q19’s outlook was $230.0M below due to lower NAND as B. Riley FBR had feared, but also on now-acknowledged EUV share loss and a DRAM export restriction. Shares eased 7.6% AMC. On industry matters, the CY18/19 spending tone was audibly cautious, and while CY18/19’s $100B bogey was unchanged, it seems CY19’s view is closer to $47.0B, a 5% Y/Y drop. In addition, mgmt notes F1Q may not be a bottom, a concern firm had raised due to Memory push-out risk. Further, they sense that within CY19’s spend, mix shift to EUV favors ASML but hurts AMAT. On lower ests but a slightly higher multiple, firm’s PT falls from $36 to $33. Shares trade at ~9.2x their new CY19 EPS, a 35.0% discount to T10-year averages but adverse est risk and a concern with potential rangebound stock action well into CY19 when spending can more significantly improves sustains a Neutral rating.
  • Cowen touches on AMAT’s reported in line Oct Q results. They highlight that the weaker than expected Jan Q guidance was due to US export control restrictions on sales to Jinhua, timing of customers’ purchases of EUV tools, and lowered visibility on the WFE recovery were the main surprises. AMAT guided its semis revenues -3% Q/Q but would have been up Q/Q ex-Jinhua export restrictions, and compares to LRCX guiding C4Q up 7% Q/Q.

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