Applied Materials (AMAT, Financial) saw its stock dip by 3% today, despite posting solid Q3 (July) results. The semiconductor equipment giant exceeded analyst expectations for both earnings and sales, and its Q4 (October) projections aligned with consensus. CEO Gary Dickerson highlighted the transformative potential of AI technology.
Why the Negative Reaction?
Expectations had soared ahead of the Q3 results, with AMAT shares rising over 20% from August 5 intraday lows. However, AMAT's broad Q4 guidance, indicating adjusted EPS of $2.00-2.36 and revenues of $6.53-7.33 billion, reflected heightened macroeconomic uncertainty. The revenue forecast suggested a modest 3.1% year-over-year increase at the midpoint, a slowdown from Q3. Investors may be seeking narrower guidance ranges, especially given the anticipated ramp-up in wafer fab equipment spending in 2025, as noted by peers like KLA Corp (KLAC, Financial) and Lam Research (LRCX, Financial).
- AMAT's Q3 report highlighted key industry trends such as AI, IoT, robotics, electric and autonomous vehicles, and renewable energy. AI demand is particularly significant, with AMAT expecting its advanced packaging product revenue to double in the coming years. AI training requires advanced logic, DRAM, and high-bandwidth memory (HBM), areas where AMAT has a strong presence.
- Most of these sectors saw growth in Q3, boosting AMAT's consolidated revenue by 5.5% year-over-year to $6.78 billion and driving an 11.6% increase in adjusted EPS to $2.12. The company noted strong AI and data center computing demand, robust DRAM shipments despite an 11-point sequential decline in China sales, and growing HBM adoption. Leading-edge foundry-logic demand was down year-over-year but improved sequentially, indicating rising interest in advanced packaging.
- Other segments also performed well. NAND memory sales rose by 10% year-over-year, while ICAPS (IoT, Communication, Automotive, Power, and Sensor) demand was steady, despite some weaknesses in industrial and automotive sectors. Applied Global Services grew by 8% year-over-year, driven by increased customer factory utilization. Display segment revenue increased by 7%, with management forecasting significant capital investment in OLED technology to support continued growth.
Despite today's stock movement, AMAT's Q3 report was robust. The growing demand for AI is a strong tailwind as AMAT moves into its final quarter of FY24. While investor expectations led to a muted response today, we remain positive on AMAT's long-term prospects and view significant pullbacks as good entry opportunities.
