Applied Materials Earnings – Materially Good or Bad?

Applied Materials, $Applied Materials(AMAT)$ is scheduled to announce Q2 FY2022 earnings after market close on 19 May.

Consensus EPS estimate is $1.90 (+16.6% year-on-year, y-o-y) and the consensus revenue estimate is $6.35 billion (+13.8% y-o-y). In earnings reporting over the past two years, AMAT has beaten EPS estimates 88% of the time and revenue estimates 75% of the time. Expectation is high that it would beat on both metrics this quarter as the company has been sitting on a tremendous backlog of up to $9 billion worth of orders, coming off the booming demand for chip manufacturing equipment by the semiconductor makers and foundries.

AMAT Fundamentals

While investors might be more familiar with the semiconductor makers, the likes of Intel and $NVIDIA Corp(NVDA)$, and foundries such as $Taiwan Semiconductor Manufacturing(TSM)$ and Samsung, AMAT is the lynchpin, as it outfitted them all with the equipment to design, prototype, manufacture and test the chips.

In fact, Applied Materials has been hailed as the “world's largest maker of tools for making semiconductors”, by Reuters.

Inside a FAB foundry

While estimates for revenue are expected to be strong this quarter, the company has guided lower revenue growth for the whole FY2022 at +14.9%, slowing to +10.2% in FY 2023 and declining -1.9% in FY2024. This rise and fall is tied closely to the wafer fab equipment upgrade cycles, which could be forecasted from semiconductor makers technology roadmap and foundries large CAPEX outlays (see chart below).

Wafer Fab Equipment Spending Forecast Source: Techinsights

The above slowdown forecast has caused a sharp drop of more than 20% of its share price since Jan 2022, alongside the broad Markets sell-out due to high inflation and rising rates environment and affecting CAPEX spending by its customers. This is compounded by supply chain disruptions due to Ukraine Russia conflict and COVID-19 lockdowns in parts of mainland China, which increased its logistics costs and affected its ability to source parts to fulfil its equipment manufacturing and installation commitments.

In an effort to boost share prices, in Mar 2022, AMAT raised its quarterly dividend by 8.3% to $0.26 and announced a new $6 billion stock buyback program payable in June. It has boosted share price in short term but unfavourable macro conditions of Fed rate hike worries, and continued supply chain woes dampened any sustain share price rally.

One positives from the drop in share price is AMAT valuation now presents an attractive investment proposition compared to 2021. At current price of $111.34, it is trading up to 44.2% below its fair value of $199.54.

AMAT price at close of 18 May vs fair value. Source: Simply Wall St

AMAT Technicals

From longer term Weekly chart, AMAT price is now in a downtrend, breaking below the 20 and 50 MA but still above longer term 200 MA.

Weekly Chart AMAT

Having traded in two uptrend cycles since the third quarter of 2020, price is now poised at the top of the downwards channel, and strong Q2 earnings beat might just be the catalyst for it to breakout from this channel.

On the downside, if there is negative sentiment and guidance, price could reach the psychological $100 or even lower up to $89 to $80 price range if caught in broader Markets sell-off.

For long and short target prices post earnings, we look at Daily chart of AMAT.

Daily Chart AMAT

Bullish or long scenario could see price reach 50 MA $120.51 (+8.24%) as first target, and in medium term, price could retrace back up to 0.382 Fib level of $127.46 (+14.48%).

Bearish or short scenario could see price drop to previous recent low of $102.99 (-7.50%). Larger drop especially if stock price is caught in broader Market sell-off or big earnings miss would see price reaching $100 (-10.19%) in short time.

Due to broader Market weakness and uncertainty, it might be prudent to be conservative, and initiate positions post earnings, where there will be more clarity that AMAT business is materially good or bad (for that matter) presently and in going forward.