Applied Materials Results Show A Slowing Semiconductor Market

Applied Materials, Inc. Nasdaq: AMAT  is an American semiconductor company that supplies equipment, services, and software for the manufacture of semiconductor chips for electronics, computers, smartphones, televisions, and solar-based productions. It is headquartered in San Diego California.

Applied Material posted better than expected results for the third quarter, leading to shares falling by 3% in early-market trading.  Adjusted earnings per share increased by 2%, meanwhile, revenue increased by 5%.

Management states the following:

“Memory spending is expected to be lower than in 2022 as macro uncertainty and weakness in consumer electronics and PCs causes these customers to defer some capacity additions," CEO Gary Dickerson told investors on a conference call late Thursday. “

"Leading-edge foundry-logic looks strong with customers battling for leadership and racing to be first to implement major technology inflections (and) ICAPS customers who serve IoT, communications, auto, power and sensor markets, are reporting areas of strength and weakness,"

Applied Materials revenue is expected to be up 15% for the fiscal year, and management currently expects that 2023 demand is likely to decline from 2022, as macro uncertainty and lower demand for memory-based products are expected to weigh on demand. The leading edge foundry logic division continues to look strong on the other. Demand is also expected to increase from the IoT division, from communications, auto, power, and sensors markets.

The biggest risk remains the consumer-centric market, as demand for PCs and smartphones continues to remain weak. Most semiconductor manufacturers including Samsung Electronics (OTCPK: SSNLF) and Taiwan Semiconductor Manufacturing (NYSE: TSM) have all reduced their capital spending in recent times.

The company’s valuation remains relatively muted considering that the stock is trading at a price-to-earnings of 14x. While the forward earnings are quite cheap at 12x, the semiconductor industry’s cyclical nature will have investors worried, and is likely to keep the stock muted for a while. But the debt to equity remains quite low, at 0.47, which is a positive considering the capital expenditure in recent times.

Excess inventory remains an issue through 2023, as new fabs come onto the market.  Significant new capacity coming onto the market from various sources is a major factor. According to IDC research, “Overall, the semiconductor industry remains on track to deliver another healthy year of growth as the supercycle that began in 2020 continues this year," said Mario Morales, group vice president, Semiconductors at IDC. "The financial and system markets remain narrowly focused on shortages across specific sectors of the supply chain, but what is more important to emphasize is how critical semiconductors are to every major system category and semiconductor content growth that remains unabated over the next five to seven years."

The biggest issue remains the mixed signal the market is sending. Semiconductors have historically gone through a number of cycles, where semiconductor stocks have fallen significantly as a result. And once again issues are slowly starting to show up in the industry. Major semiconductor makers have recently warned that another downcycle might be on the way.

Applied Material’s operations, despite the potential for hiccups, remain relatively strong, and the company produced an operating cash flow of $1.47 billion for the quarter and returned most of the cash back to investors. Year to date Applied Materials has produced a free cash flow of $4 billion.  Operating margins for the business remain healthy at 32% and profit margins have been around 27%, which should help the company maintain operational efficiency and remain solvent during a down cycle.

The stock's technical remains strong with the 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 moderate at around 50, which shows the stock is neither overbought nor oversold.

Overall, Applied Materials remains a stock that is likely to be watched by investors closely as almost a canary in the coal mine, as we could be heading for a reversal in fortunes for semiconductor makers.