Maker of machinery employed in semiconductor manufacturing, Applied Materials (NASDAQ:AMAT) announced better-than-expected results in the Q4 FY2022 quarter, with revenue up 10.2% year on year to $6.74 billion. On top of that, guidance for next quarter's revenue was surprisingly good, being $6.7 billion at the midpoint, 4.48% above what analysts were expecting. Applied Materials made a GAAP profit of $1.59 billion, down on its profit of $1.71 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) Q4 FY2022 Highlights:
- Revenue: $6.74 billion vs analyst estimates of $6.43 billion (4.85% beat)
- EPS (non-GAAP): $2.03 vs analyst estimates of $1.74 (16.8% beat)
- Revenue guidance for Q1 2023 is $6.7 billion at the midpoint, above analyst estimates of $6.41 billion
- Free cash flow of $634 million, down 49.6% from previous quarter
- Inventory Days Outstanding: 148, up from 143 previous quarter
- Gross Margin (GAAP): 45.9%, down from 48% same quarter last year
“Applied Materials delivered a strong finish to our fiscal year with record performance, and we remain focused on mitigating supply chain constraints and doing everything possible to meet customer demand,” 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.
Applied Materials's revenue growth over the last three years has been strong, averaging 21.3% annually. But as you can see below, last year has been more steady, with quarterly revenue growing from $6.12 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).
While Applied Materials beat analysts' revenue estimates, this was a very slow quarter with just 10.2% revenue growth. This marks 12 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 6.84% YoY next quarter, analyst consensus sees 7.3% declines 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.
This quarter, Applied Materials’s inventory days came in at 148, 7 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 Q4 Results
With a market capitalization of $89.6 billion, more than $2.58 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 were impressed by how strongly Applied Materials outperformed analysts’ earnings expectations this quarter. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. On the other hand, revenue growth is overall a bit slower these days and gross margin deteriorated a little. Zooming out, we think this was still a decent quarter, showing the company is staying on target. The company is up 2.39% on the results and currently trades at $106.99 per share.
Should you invest in Applied Materials 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.