Applied Materials Stock a Supply Chain Regain Play

Semiconductor testing equipment maker Applied Materials NASDAQ: AMAT stock has been a dependable gauge on the chip sector. The Company is right in the middle of the global chip shortage and supply chain disruptions. Bolstering the supply chain is a top priority. The fiscal Q2 2022 quarter missed guidance due to some suppliers delaying orders due to the China COVID lockdowns in April. This caused a $150 million impact on the quarter, which will be recovered later as orders were not canceled but delayed. Bringing the supply chain capacity back online is a top priority. The Company is actively streamlining the process of installation to high volume production of chips for its customers which will cut down on the many months it normally takes. The Company will emerge from the supply chain disruption as a more efficient operator with stronger supplier engagements. This makes Applied Materials an end-of-year early 2023 story as it will improve as the supply chain returns back to normal. The Company has the orders booked and a growing backlog which it believes the unconstrained demand for wafer fab equipment to exceed $100 billion for the industry. It’s just a matter of when, not if the supply chain issues get resolved. Prudent investors who have been patiently waiting to gain exposure to the semiconductor supply chain recovery can watch for opportunistic pullback levels in shares of Applied Materials.

Q2 Fiscal 2022 Earnings Release

On May 19, 2022, Applied Materials reported its fiscal Q2 2021 results for the quarter ending April 2022. The Company reported a diluted earnings-per-share (EPS) of $1.85, missing consensus analyst estimates of $1.90 by (-$0.05). Revenues rose 11.9% year-over-year (YoY) to $6.25 billion also falling short of the $6.35 billion estimates. The Company was adamant that demand has never been stronger but it is constrained by the ongoing supply chain issues. The Company generated $415 million in cash and returned $2.01 billion to shareholders comprised of $1.80 billion in buybacks and $211 million in dividends. Applied Materials CEO Gary Dickerson commented, “Demand for Applied Materials’ products and services has never been stronger, yet we remain constrained by ongoing supply chain issues. Our priority is to work quickly and creatively across the supply chain to bring more industry capacity online while accelerating the technology inflections that we believe will enable Applied to outgrow the semiconductor market in the years ahead.”

Downside Guidance

Applied Materials provided downside EPS guidance for fiscal Q3 2022 EPS between $1.59 to $1.95 versus $2.04 consensus analyst estimates. The Company sees fiscal Q3 2022 revenues to come in between $5.85 billion to $6.65 billion versus the $6.68 analyst estimates.

Conference Call Takeaways

CEO Dickerson started right off by stating that demand has never been stronger or broader, but the ability to fulfill the growing demand has been stifled due to the ongoing supply chain constraints. He described Q2 2022 as a two-part story as February and March were seeing key bottleneck components resolved but the COVID shutdown in April further disrupted the supply chain. The shutdown had a $150 million impact on the quarter as a result of some suppliers temporarily shutting down, but orders are delayed not canceled. He stated that the number one priority is to resolve supply chain issues and bring more capacity online. Specifically the shortage of silicon components and other parts of the subsystems of its tools. The Company is working to mitigate disruptions, “We are doing whatever it takes to deliver for our customers from sending Applied resources to supplier sites, qualifying alternative parts, investing in our supply chain to working with customers in creative ways to accelerate shipments, including merging system modules at their sites. In addition, we're collaborating with customers using our technology-enabled services to fast track the start-up and qualification of equipment once it arrives at their fabs.” The Company is working to trim down the timeline from shipment of a tool from the factory to the first production wafer in the client’s factory can take months. These adjustments will ultimately result in a more efficient workflow and stronger supplier engagements.

AMAT Opportunistic Pullback Levels

Using the rifle charts on the weekly and daily time frames provides a precise view of the playing field for AMAT shares. The weekly rifle chart is slipping again to retest the prior bottom near the $101.35 Fibonacci (fib) level. The weekly rifle chart formed an inverse pup breakdown on the collapse through the weekly 5-period moving average (MA) at $110.93 followed by a falling 15-period MA at $118.17.The weekly lower Bollinger Bands (BBs) sit at $93.67. The weekly stochastic is ready to cross down at the 20-band test. The initial bounces peaked at the weekly market structure low (MSL) buy trigger at $119.70, which needs to break in order to reverse the downtrend. The daily rifle chart has a breakdown with a falling 5-period MA at $110.45 followed by the 15-period MA at $112.16 and a falling 50-period MA at $114.15. The daily stochastic formed a mini inverse pup under the 80-band working a full oscillation attempt as it falls to the 50-period MA. The daily lower BBs sits at $100.65. Prudent investors can watch for opportunistic pullback levels at the $99.37 fib, $95.12 fib, $90.26 fib, $85.46, $84.20, $80.93 fib, $78.76 fib, and $74.54 fib. Upside trajectories range from the $116.58 fib level up to the $137.18 fib level.