AMAT Stock: Can Applied Materials beat short-term challenges?

The general economic slowdown and inflation are taking a toll on all businesses, and the semiconductor equipment industry is no different. While the challenges are likely to continue this year, chip equipment maker Applied Materials, Inc. (NASDAQ: AMAT), is optimistic about staying on the growth path.

After slipping to a two-year low, the company’s stock rebounded a few months ago and is making steady gains. Currently, it is trading above the 52-week average. The recovery is likely to gather steam in the coming months as economic uncertainties ease and operating conditions improve. The relatively low valuation gives a good investment opportunity and prospective investors can use it as an entry point, as the stock is unlikely to get cheaper in the near future.

Resilience

The Santa Clara-based company, the largest provider of semiconductor fabrication equipment, has a good track record of expanding market share and diversifying the business. Past performance shows the company is capable of effectively dealing with adversities and coming out stronger.  

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Moreover, it is part of an industry that has long-term secular tailwinds. While predicting a strong performance for the current quarter, the management expects revenues to be affected by a recent cybersecurity event at one of the suppliers.

Speaking at the earnings conference call this week, the company’s CEO Gary Dickerson said: “While we are cognizant of near-term volatility in our markets and ready to respond to both upside or downside, our long-term outlook remains highly positive. Semiconductors are the foundation of the digital economy making them more strategically and economically important than ever before. Around the world, governments are incentivizing the industry to build regional manufacturing capacity and accelerate investments in strategic next-generation technologies.”

Good and Bad

The Display segment, Applied Materials’ smallest operating unit in terms of revenue, contracted in recent quarters, limiting its dependable revenue streams to the core Semiconductor Systems division and Applied Global Services segment. Another concern is the continuing slowdown in the company’s China business.

In the January quarter, revenues grew in double digits across all operating segments — except in China where sales declined — and lifted total revenues to $6.7 billion. At $2.03 per share, adjusted profit was up 7%. Both revenues and net earnings beat estimates for the third time in a row.

Financials

Operating cash flow remained healthy during the quarter, despite short-term challenges like slower production and softness in order growth. Going forward, the rapidly expanding services business would be a key growth driver, together with the steady demand for automotive and artificial intelligence products. At the same time, recent improvements in the supply chain should enable the company to fulfill order backlogs.

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Applied Materials Inc. Q1 2023 Earnings Call Transcript

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After the market’s mixed response to the earnings report, Applied Materials’ shares traded higher on Friday afternoon. They have gained about 20% after starting the year on a positive note.