Applied Materials (NASDAQ:AMAT) Reports Weak Q2

Adam Hejl /
2022/05/19 4:15 pm EDT

Maker of machinery employed in semiconductor manufacturing, Applied Materials (NASDAQ:AMAT) fell short of analyst expectations in Q2 FY2022 quarter, with revenue up 11.8% year on year to $6.24 billion. Guidance for the next quarter also missed analyst expectations with revenues guided to $6.25 billion at the midpoint, or 6.43% below analyst estimates. Applied Materials made a GAAP profit of $1.53 billion, improving on its profit of $1.33 billion, in the same quarter last year.

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Applied Materials (AMAT) Q2 FY2022 Highlights:

  • Revenue: $6.24 billion vs analyst estimates of $3.54 billion (1.63% miss)
  • EPS (non-GAAP): $1.85 vs analyst expectations of $1.90 (2.75% miss)
  • Revenue guidance for Q3 2022 is $6.25 billion at the midpoint, below analyst estimates of $6.67 billion
  • Free cash flow of $205 million, down 91.8% from previous quarter
  • Inventory Days Outstanding: 137, up from 124 previous quarter
  • Gross Margin (GAAP): 46.8%, down from 47.5% same quarter last year

“Demand for Applied Materials’ products and services has never been stronger, yet we remain constrained by on-going supply chain issues,” 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 18.8% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $5.58 billion to $6.24 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

It was a tough quarter for Applied Materials, with weak revenue growth of just 11.8%, which missed analyst estimates by 1.64%.This was the third straight quarter of decelerating growth for Applied Materials, potentially indicating a coming cycle downturn.

While revenue growth has decelerated the past three quarters, Applied Materials thinks growth will remain positive next quarter guiding to estimated 0.87% year on year growth and Wall Street analyst consensus also sees growth over the next twelve months of 16.3%.

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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 137, 2 days below the five year average, showing that despite the recent increase there is no indication of an excessive inventory buildup at the moment.

Key Takeaways from Applied Materials's Q2 Results

With a market capitalization of $98.3 billion, more than $3.92 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 struggled to find many strong positives in these results. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations. Overall, this quarter's results were not the best we've seen from Applied Materials. The company is down 4.61% on the results and currently trades at $105.63 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.

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