Over the past six months, Applied Materials (AMAT) has not performed as well as the broader semiconductor sector, experiencing an 18% decline, whereas the PHLX Semiconductor Sector index remained stable. The company’s recent quarterly results are unlikely to improve its situation.
Applied Materials, a provider of chip manufacturing equipment, reported its fiscal 2025 first quarter results on February 13, for the period ending January 26. Although revenue and earnings exceeded Wall Street predictions, the company’s cautious guidance led to an 8% drop in its stock the following day.
The impact of export controls, particularly those imposed by the previous U.S. administration, has negatively affected Applied Materials’ business in China. During the recent earnings call, CEO Gary Dickerson stated that U.S. companies are facing constraints in serving the Chinese market due to updated trade rules from December and January. These changes are projected to result in a $400 million revenue impact for Applied Materials in fiscal 2025, with half of this being service revenue.
Consequently, the company’s revenue guidance of $7.1 billion for the current quarter falls short of the $7.22 billion consensus estimate. However, Applied Materials still anticipates nearly a 7% year-over-year increase in its revenue for the current quarter, compared to its previous flat performance.
Moreover, the company expects a midpoint earnings per share of $2.30, indicating a significant improvement from the prior year’s 5% increase. This growth aligns with Applied Materials’ performance in the fiscal first quarter.
Despite these challenges, Applied Materials appears to be navigating the restrictions successfully, showing better results than the previous year. The company anticipates that “China will be a smaller portion of global wafer fab equipment spending in 2025.” SEMI, an industry association, forecasts a 7% increase in semiconductor manufacturing equipment spending for the current year, with a 15% increase expected in 2026. This suggests that Applied Materials could have opportunities to expand its sales and earnings beyond China.
The company projects its services business to experience low double-digit growth in the long term, even with its constrained ability to serve the Chinese market. Additionally, increased spending on wafer and fabrication equipment resulted in a 9% year-over-year increase in its semiconductor systems business to $5.4 billion. Given that this segment contributes significantly to the company’s revenue, it is likely to continue driving growth in the future, supported by the favorable semiconductor spending environment.
Applied Materials is trading at 21 times trailing earnings, compared to the Nasdaq-100 index’s earnings multiple of 34. The company’s recent double-digit earnings growth, coupled with increased semiconductor spending, could support sustained growth. Thus, analysts anticipate a slight improvement in the company’s bottom line, following a 7% increase in the previous fiscal year to $8.65 per share.
Considering the prospects of the end market served by Applied Materials, the company could potentially outperform consensus estimates, making its stock an appealing option for investors following its recent decline. The broader outlook suggests that Applied Materials has the potential for long-term improvement.
