Applied Materials (NASDAQ:AMAT) Q1 Sales Beat Estimates, Next Quarter Growth Looks Optimistic

Anthony Lee /
2023/02/16 4:09 pm EST
Add to Watchlist

Maker of machinery employed in semiconductor manufacturing, Applied Materials (NASDAQ:AMAT) beat analyst expectations in Q1 FY2023 quarter, with revenue up 7.46% year on year to $6.74 billion. Guidance for next quarter's revenue was $6.4 billion at the midpoint, which is 1.13% above the analyst consensus. Applied Materials made a GAAP profit of $1.72 billion, down on its profit of $1.79 billion, in the same quarter last year.

Is now the time to buy Applied Materials? Access our full analysis of the earnings results here, it's free.

Applied Materials (AMAT) Q1 FY2023 Highlights:

  • Revenue: $6.74 billion vs analyst estimates of $6.66 billion (1.25% beat)
  • EPS (non-GAAP): $2.03 vs analyst estimates of $1.92 (5.68% beat)
  • Revenue guidance for Q2 2023 is $6.4 billion at the midpoint, above analyst estimates of $6.33 billion
  • Free cash flow of $1.98 billion, up from $634 million in previous quarter
  • Inventory Days Outstanding: 153, up from 148 previous quarter
  • Gross Margin (GAAP): 46.7%, down from 47.2% same quarter last year

“While the economy and semiconductor industry are facing challenges in 2023, Applied Materials delivered strong first quarter results, and we believe Applied is well positioned to outperform our markets this year,” said Gary Dickerson, President and CEO.

Founded in 1967 as the first company that built the tools for other companies to use to make semiconductors, Applied Materials (NASDAQ:AMAT) is the largest provider of semiconductor wafer fabrication equipment.

The semiconductor industry is driven by demand for advanced electronic products like smartphones, PCs, servers and data storage. The growth of data and technologies like artificial intelligence, 5G networks and smart cars are also creating a next wave of growth for the industry. To keep up with ever changing customer needs requires new tools that can design, fabricate and test at ever smaller sizes and more complex architectures, and that is driving the demand for semiconductor capital manufacturing equipment.

Sales Growth

Applied Materials's revenue growth over the last three years has been strong, averaging 21.1% annually. But as you can see below, last year has not been especially strong, with quarterly revenue growing from $6.27 billion to $6.74 billion. Semiconductors are a cyclical industry and long-term investors should be prepared for periods of high growth, followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

Applied Materials Total Revenue

While Applied Materials beat analysts' revenue estimates, this was a very slow quarter with just 7.46% revenue growth. This marks 13 straight quarters of revenue growth, which means the current upcycle has had a good run, as a typical upcycle tends to be 8-10 quarters.

Applied Materials' appears to be headed for a downturn. While the company is guiding to growth of 2.48% YoY next quarter, analyst consensus sees 12.7% declines over the next twelve months.

In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. You can find it on our platform for free.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise the company may have to downsize production.

Applied Materials Inventory Days Outstanding

This quarter, Applied Materials’s inventory days came in at 153, 11 days above the five year average, suggesting that that inventory has grown to higher levels than what we used to see in the past.

Key Takeaways from Applied Materials's Q1 Results

With a market capitalization of $101 billion, more than $4.05 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

We liked to see that Applied Materials beat analysts’ earnings expectations pretty strongly this quarter. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. On the other hand, it was less good to see the deterioration in operating margin. Overall, this was still a decent quarter for Applied Materials. The company is up 2.73% on the results and currently trades at $118.5 per share.

Applied Materials may have had a tough quarter, but does that actually create an opportunity to invest right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

One way to find opportunities in the market is to watch for generational shifts in the economy. Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks and as a result, the demand for cloud-native cybersecurity is skyrocketing. This company is leading a massive technological shift in the industry and with revenue growth of 70% year on year and best-in-class SaaS metrics it should definitely be on your radar.

The author has no position in any of the stocks mentioned.