Applied Materials (NASDAQ:AMAT) Q3: Strong Sales, Provides Optimistic Guidance For Next Quarter

Max Juang /
2023/08/17 4:14 pm EDT

Maker of machinery employed in semiconductor manufacturing, Applied Materials (NASDAQ:AMAT) reported Q3 FY2023 results exceeding Wall Street analysts' expectations, with revenue down 1.46% year on year to $6.43 billion. On top of that, next quarter's revenue guidance ($6.51 billion at the midpoint) was surprisingly good and 10.9% above what analysts were expecting. Applied Materials made a GAAP profit of $1.56 billion, down from its profit of $1.61 billion in the same quarter last year.

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Applied Materials (AMAT) Q3 FY2023 Highlights:

  • Revenue: $6.43 billion vs analyst estimates of $6.16 billion (4.29% beat)
  • EPS (non-GAAP): $1.90 vs analyst estimates of $1.75 (8.88% beat)
  • Revenue Guidance for Q4 2023 is $6.51 billion at the midpoint, above analyst estimates of $5.87 billion
  • Free Cash Flow of $2.33 billion, up 14.3% from the previous quarter
  • Inventory Days Outstanding: 153, up from 153 in the previous quarter
  • Gross Margin (GAAP): 46.3%, in line with the same quarter last year

“Over the past several years, we have focused our strategy and investments on key technologies to accelerate the Internet of Things and AI era, enabling us to consistently deliver strong results in 2023 and positioning Applied Materials for sustainable outperformance,” 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 solid, averaging 18.5% annually. But as you can see below, its revenue declined from $6.52 billion in the same quarter last year to $6.43 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

Even though Applied Materials surpassed analysts' revenue estimates, this was a slow quarter for the company as its revenue dropped 1.46% year on year.

Applied Materials's revenue inverted from positive to negative growth this quarter, which was unfortunate to see. Looking ahead to the next quarter, the company's management team forecasts a 3.54% year-on-year revenue decline. Analysts seem to agree that the poor performance will continue, as their average revenue growth estimates for the next 12 months are negative 11.1%.

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Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity 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 DIO came in at 153, which is 9 days above its five-year average, suggesting that the company's inventory levels are higher than what we've seen in the past.

Key Takeaways from Applied Materials's Q3 Results

With a market capitalization of $116 billion, a $6.54 billion cash balance, and positive free cash flow over the last 12 months, we're confident that Applied Materials has the resources needed to pursue a high-growth business strategy.

We were impressed by how significantly Applied Materials blew past analysts' revenue and EPS expectations this quarter, driven by outperformance in its semiconductor systems and display segments. We were also glad that next quarter's revenue and EPS guidance came in higher than Wall Street's estimates. Overall, we think this was a strong quarter that should satisfy shareholders. The stock is up 3.45% after reporting and currently trades at $142.14 per share.

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