Applied Materials Is In The Semiconductor Sweet Spot

Key Points

• Applied Materials reported better than expected results and guidance, shares steady. 
• The company is in the sweet spot regarding trends in the semiconductor industry. 
• Capital returns help make this stock an attractive buy for 2023. 

There are 2 narratives within the semiconductor industry and Applied Materials NASDAQ: AMAT  is in the sweet spot regarding 2023. Those narratives are 1) spotty activity within the industry driven by oversupply and sluggish demand in end-markets like gaming and consumer products and 2) a shift toward next-generation technology.

While companies like Advanced Microdevices NASDAQ: AMD report mixed results, their internals show demand is still strong for industrial applications and next-generation technology.

That is where Applied Materials come into the picture. Applied Materials is part of the infrastructure of the semiconductor industry NYSEARCA: SOXX and produces the equipment and services semiconductor foundries need to make that next-gen tech. And the results show it. 

“While the economy and semiconductor industry are facing challenges in 2023, Applied Materials delivered strong first quarter results, and we believe Applied is well positioned to outperform our markets this year,” said Gary Dickerson, President and CEO. “Our resilience is underpinned by our strong positions with leading customers at key technology inflections, large backlog of differentiated products and growing service business.”

Applied Materials Beats And Raises, Shares Steady 

Applied Materials had a good quarter and produced results that outpaced the group and the broader S&P 500 by growing and outperforming the Marketbeat.com consensus estimate. The company reported $6.74 billion in net revenue for a gain of 7% over last year. The revenue beat by $0.080 or about 120 bps, which is slim, but the company outperforms in a world where most companies aren’t. 

Coincidentally, even Applied Materials' internal results prove the dual narrative within the industry. The segment results have Semiconductor Systems sales up 13% to lead the company and is driven by strength in the foundry and related sub-segment. The Applied Global Services segment grew by a smaller 3.74%, but the consumer-oriented Display segment shrank versus last year.

The salient point is that display is a small contribution to total revenue, and the company’s position and diversification are helping it outperform. 

The company’s margins contracted slightly versus last year, but the contraction was less than expected and aided by share repurchases. The gross margin contracted by 230 and 220 bps GAAP and adjusted, while the operating margin also contracted by a small amount, but earnings grew in both comparisons versus last year.

The GAAP earnings set a company record, and the adjusted grew by 7% to outpace the analyst's estimates by a dime. The company also issued favorable guidance concerning the estimates and already spurred a round of positive analyst commentary. 

The Analysts Drive Applied Materials Into A Reversal 

The price action in Applied Materials hit bottom in 2022 and is on the verge of a full reversal. The results, outlook and subsequent analyst activity, are the reason why. The analysts, specifically, have issued at least 6 price target upgrades since the Q1 release and they have the price target moving higher after hitting bottom over the last quarter.

The new consensus is about 7% above the price action, which isn’t much but it is above key resistance. The neckline of a Hear & Shoulders Pattern is at the $120 level and should be considered a trigger point for the market. A move above that level could quickly get the stock up to the $140 level and a move above there would open the door to $160.

If not, AMAT shares may remain rangebound with the top at $120 until there is some other catalyst to drive it.