Applied Materials (NASDAQ:AMAT) stock was hammered in after-hours trading on Nov. 15 after the company provided disappointing guidance, but is the chip equipment sector really in trouble?
Applied Materials said it earned $876 million, or 97 cents per share, on revenues of $4.0 billion for the quarter that ended in October. The company’s profits rose just 1% versus the same quarter in 2017. AMAT stock initially plunged almost 10% in after-hours trading on Nov. 15, but recovered to finish up 1% on Nov. 16.
Some investors were evidently disappointed by the company’s results, even though its earnings beat analysts’ consensus estimate of 95 cents per share. The problem was that the company’s bottom-line guidance was considered weak, as its EPS for its current fiscal quarter is now expected to come in at just 75 cents-83 cents.
Management insisted during its earnings conference call that AMAT’s long-term outlook is great, but it warned that orders for the company’s equipment that’s used to make memory chips have slowed recently.
AMAT Vs. KLA Tencor
While AMAT stock has been sinking all year and is now down about 33% from where it was at the beginning of 2018, the shares of its smaller rival, KLA Tencor (NASDAQ:KLAC), have not been nearly as weak. In fact, until the tech rout began in September, KLAC stock was actually up for the year.
Chip equipment stocks tend to be a “canary in the coal mine” for the whole tech sector, falling before the rest of the sector does and recovering sooner as well. But KLA Tencor stock has done better than AMAT stock since 2000. AMAT stock is up only 29% since late 2000 despite introducing a dividend in 2005 that doubled early in 2018 and now is up to 20 cents per share, representing a yield of 2.33%.
Many analysts responded to AMAT’s results by saying that “the chip slowdown is real,” but those concerns may be overblown. It’s true that Nvidia (NASDAQ:NVDA) was slammed after it fell short of the consensus revenue estimate by $50 million, citing the end of the cryptocurrency mining boom. But crypto was always viewed by many as a temporary boost for Nvidia’s results and NVDA will recover, as its sales continue to grow.
Memory, the most volatile part of the semiconductor business and the area in which AMAT is especially strong, is the only part of its business that’s suffering from significantly slowing demand. But the shares of memory suppliers like Micron Technology (NASDAQ:MU) have already begun to recover, as investors are beginning to be enticed by their low valuations.
While AMAT has been bringing 26% of its revenue to its bottom line recently, KLA Tencor’s margins have been around 36%. So the companies’ margins suggest that AMAT’s problems may be company-specific, rather than a problem shared by the entire industry.
Are AMAT’s Problems Short-Term or Long-Term?
The bigger question for owners of AMAT stock is whether its current problems are a short-term blip or a long-term trend.
Analysts have been becoming noticeably less bullish on Applied lately, as five of them have dropped their “buy” recommendations, with most of those moving towards a “hold” recommendation or an equivalent rating. The downgrades seem to have been primarily triggered by the slowdown of the company’s memory chip business.
The Bottom Line on AMAT Stock
If you agree with AMAT’s position that the chip slowdown has been mainly caused by temporary weak memory chip pricing, now would be a good time to buy AMAT stock, since its price-earnings multiple is just 10.2 and it still has $5 billion in the bank.
If you think that Nvidia’s miss suggests that the chip sector is generally weak, or that the trade conflict is about to intensify, this might not be the time to buy AMAT stock. Over the long-term, I’m more upbeat on KLAC than AMAT.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.