Applied Materials Results Show Slowing Semiconductor Market

Applied Materials, Inc. (Nasdaq: AMAT) is an American semiconductor company that provides equipment, services and software for manufacturing semiconductor chips for electronics, computers, smartphones, televisions and solar productions. Its headquarters are in San Diego, California.

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Applied Material posted better-than-expected Q3 results, dragging shares down 3% in early trading. Adjusted earnings per share increased 2%, while revenue increased 5%.

Management states the following:

“Memory spending is expected to be lower than 2022 as macroeconomic uncertainty and weakness in consumer electronics and PCs cause these customers to postpone some capacity additions,” said CEO Gary Dickerson to investors on a conference call Thursday evening. "

“Edge foundry logic looks solid with customers vying for leadership and rushing to be first to implement major technology inflections (and) ICAPS customers serving IoT markets , communications, automotive, energy and sensors, point out strengths and weaknesses,"

Applied Materials revenue is expected to grow 15% for the year, and management currently expects 2023 demand to decline from 2022 as macroeconomic uncertainty and lower demand for memory-based products is expected to weigh on demand. The advanced foundry logic division continues to look strong on the other. Demand is also expected to increase from the IoT division, communications, automotive, energy and sensor markets.

The biggest risk remains the consumer-centric market, as demand for computers and smartphones remains weak. Most semiconductor manufacturers, including Samsung Electronics (OTCPK:SSNLF) and Taiwan Semiconductor Manufacturing (NYSE:TSM), have all cut capital expenditures lately.

The company's valuation remains relatively moderate given that the stock trades at a 14x price-earnings ratio. While forward earnings are pretty cheap at 12x, the cyclical nature of the semiconductor industry will worry investors and should keep the stock muted for some time. But the debt-to-equity ratio remains quite low at 0.47, which is positive given the capital spending of late.

Excess inventory will remain a problem through 2023 as more plants come to market. The arrival of significant new capacities on the market from various sources is a major factor. According to IDC research, "Overall, the semiconductor industry remains on track to deliver another year of healthy growth as the supercycle that began in 2020 continues this year," said Mario Morales, vice president of the Semiconductors group at IDC. “Financial and systems markets remain tightly focused on shortages in specific areas of the supply chain, but what is more important to highlight is how critical semiconductors are to each major system category. and semiconductor content growth that remains unchanged over the next five to seven years. ."

The biggest problem remains the mixed signal sent by the market. Semiconductors have historically gone through a number of cycles, during which semiconductor stocks have fallen significantly. And once again, problems are slowly starting to appear in the industry. Major semiconductor manufacturers recently warned that another down cycle could be underway.

Applied Material's operations, despite the potential for setbacks, remain relatively strong, and the company generated operating cash flow of $1.47 billion for the quarter and returned most of the money to investors. Year-to-date, Applied Materials has generated free cash flow of $4 billion. The company's operating margins 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 solid with 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 subdued at around 50, showing that the stock is neither overbought nor oversold.

Overall, Applied Materials remains a stock that is likely to be watched closely by investors like almost a canary in the coal mine, as we could be heading for a reversal of fortune for semi manufacturers. -drivers...