Applied Materials (NASDAQ:AMAT) Reports Weak Q4, Stock Drops

Radek Strnad /
2021/11/18 4:24 pm EST
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Maker of machinery employed in semiconductor manufacturing, Applied Materials (NASDAQ:AMAT) missed analyst expectations in Q4 FY2021 quarter, with revenue up 30.6% year on year to $6.12 billion. Guidance for the next quarter also missed analyst expectations with revenues guided to $6.16 billion at the midpoint, or 4.54% below analyst estimates. Applied Materials made a GAAP profit of $1.71 billion, improving on its profit of $1.13 billion, in the same quarter last year.

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Applied Materials (AMAT) Q4 FY2021 Highlights:

  • Revenue: $6.12 billion vs analyst estimates of $6.34 billion (3.47% miss)
  • EPS (non-GAAP): $1.94 vs analyst expectations of $1.96 (small miss)
  • Revenue guidance for Q1 2022 is $6.16 billion at the midpoint, below analyst estimates of $6.45 billion
  • Free cash flow of $942 million, down 39.1% from previous quarter
  • Inventory Days Outstanding: 123, up from 116 previous quarter
  • Gross Margin (GAAP): 48%, up from 45.4% same quarter last year

“Demand for semiconductors and equipment continues to grow as the pandemic accelerates digital transformation of the economy, and currently, our supply chain cannot keep up,” 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.

Sales Growth

Applied Materials's revenue growth over the last three years has been measured, averaging 13.3% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $4.68 billion to $6.12 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

Despite missing analyst estimates this quarter, 30.6% revenue growth for Applied Materials's was still solid. This marks 8 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.

However, Applied Materials believes the growth is set to even accelerate, and is guiding for revenue to grow 31.3% YoY next quarter, and Wall St analysts are estimating growth 14.5% 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 123, 14 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 Q4 Results

Sporting a market capitalization of $140 billion, more than $5.45 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 very impressed by the strong improvements in Applied Materials’s operating margin this quarter. And we were also glad to see the improvement in gross margin. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and it missed analysts' revenue expectations this quarter. Overall, this quarter's results could have been better. The company is down 6.76% on the results and currently trades at $148 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.