Applied Materials (NASDAQ:AMAT) Q2: Strong Sales, Provides Encouraging Quarterly Guidance

Jabin Bastian /
2023/05/18 4:07 pm EDT

Maker of machinery employed in semiconductor manufacturing, Applied Materials (NASDAQ:AMAT) reported Q2 FY2023 results that beat analyst expectations, with revenue up 6.16% year on year to $6.63 billion. Guidance for next quarter's revenue was $6.15 billion at the midpoint, which is 1.73% above the analyst consensus. Applied Materials made a GAAP profit of $1.58 billion, improving on its profit of $1.54 billion, in the same quarter last year.

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Applied Materials (AMAT) Q2 FY2023 Highlights:

  • Revenue: $6.63 billion vs analyst estimates of $6.37 billion (4.07% beat)
  • EPS (non-GAAP): $2 vs analyst estimates of $1.83 (9.49% beat)
  • Revenue guidance for Q3 2023 is $6.15 billion at the midpoint, above analyst estimates of $6.05 billion
  • Inventory Days Outstanding: -2330, down from 153 previous quarter
  • Gross Margin (GAAP): 103%, up from 46.9% same quarter last year

“Applied Materials delivered strong results in our second fiscal quarter with revenues and earnings in the high-end of our guidance range, and we expect to outperform our markets in 2023,” 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 20.6% annually. But as you can see below, last year has not been especially strong, with quarterly revenue growing from $6.25 billion to $6.63 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 6.16% revenue growth. This marks 14 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's revenue growth was positive this quarter, but the company is guiding to decline of 5.67% YoY next quarter, while analysts expect to see declines of 13.8% over the next twelve months.

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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 -2330, 2349 days below the five year average, showing no indication of an excessive inventory buildup at the moment.

Key Takeaways from Applied Materials's Q2 Results

Sporting a market capitalization of $106 billion, more than $5.1 billion in cash and with positive free cash flow over the last twelve months, we're confident that Applied Materials has the resources it needs to pursue a high growth business strategy.

We were impressed by how strongly Applied Materials outperformed analysts’ earnings expectations this quarter. And we were also excited to see that it outperformed Wall St’s revenue expectations. Revenue and EPS guidance for next quarter were both ahead. On the negative side, free cash flow missed expectations. Overall, we think this was still a solid quarter, but investors might have been expecting more and the company is down 0.82% on the results and currently trades at $128.91 per share.

Applied Materials may have had a good quarter, so should you 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.

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