Shares of Applied Materials moved firmly lower in early trading Friday as analysts weighed in on the chip equipment maker's better-than-expected fiscal fourth-quarter earnings report and what they saw as a muted outlook for demand for non-ai chips going forward. year.
Applied materials (ENORMOUS) is a key player in the ai investment story, providing the equipment to produce the chips that power everything from flat-screen TVs to personal computers and smartphones.
Hyperscalers like Google (GOOGLE) microsoft (MSFT) amazon (AMZN) and metaplatforms (GOAL) They are willing to spend hundreds of billions to build and train their large language models. Analysts see that part of the investments of these cloud service providers will reach the sectors in which Applied Materials has the greatest weight.
But that demand is seen as potentially weak next year as companies allocate spending to ai projects and forecast new investments in areas such as memory and ICaps. These are chips for the Internet of Things, as well as communications, automotive, energy and sensor applications.
Applied Materials forecasts earnings for the current quarter in the region of $7.15 billion, with a margin of error of $400 million. The forecast was modestly below Wall Street forecasts and dampened the group's better-than-expected fourth-quarter report.
Concern about sales in China at AMAT
So did concerns that restrictions on high-tech exports to China by a new Trump administration would hit sales in the region, which not long ago accounted for about 45% of total revenues.
Sales in China were pegged at around 30% of revenue for the three months ended October, a level the group expects to remain in the final months of calendar 2024.
However, Chief Executive Gary Dickerson remained focused on the group's ability to develop so-called inflections, which are key changes to chip manufacturing processes that improve power and efficiency and increase profit margins.
This could be why the group's earnings outlook for the quarter, around $2.29 per share, topped Wall Street forecasts.
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“There are a lot of really good inflections that provide a tailwind for Applied,” he added during a conference call with investors Thursday evening. “And we're providing enabling technology to our customers in several different markets. So one thing that's also a tailwind for us is improving pricing as we ship more valuable products.”
KeyBanc Capital Markets analyst Steve Barger, who gives a sector-weight rating to the stock, estimated that sales of a core part of Applied Materials' so-called Gate All Around transistor could double from the $2.5 billion reported in the previous fiscal year. The GAA architecture also improves power and efficiency.
Trillion-dollar chip market through 2030: AMAT CFO
Applied Materials' outlook for sales of wafer front-end equipment, or WFE, machinery that forms the basis of chip manufacturing, was also a concern for analysts.
“We're talking about a $1 trillion semiconductor industry by 2030,” CFO Brice Hill said. “I think it's consistent that most of the industry has that view. And we certainly have that view given the increase in wafer production and additional capacity across the industry basically every year.”
“So it's hard to guarantee the 25th, but I'll just point out that our fourth quarter was year-over-year growth,” he added.
Needham analyst N. Quinn Bolton, who lowered his price target on the stock by $15 to $225 per share following last night's earnings update, sees that weighing on the stock.
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“In the long term, management believes that WFE intensity, supported by strong Chinese demand of 18% in 2023, could decrease and normalize to around 15%, essentially moving away from its long-standing view that WFE should operate online, or overcome, semi-finals,” Bolton said.
Other price target changes include Bank of America's Vivek Arya, who lowered his $10 to $220 per share, and Wells Fargo's Joe Quatrochi, who lowered his $15 to $220.
Applied Materials shares fell 8.2% in premarket trading, indicating an opening price of $172.11.
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