Applied Materials's (NASDAQ:AMAT) Q1 Sales Top Estimates But Quarterly Guidance Underwhelms

Radek Strnad /
2022/02/16 4:07 pm EST
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Maker of machinery employed in semiconductor manufacturing, Applied Materials (NASDAQ:AMAT) reported results ahead of analyst expectations in the Q1 FY2022 quarter, with revenue up 21.4% year on year to $6.27 billion. However, guidance for the next quarter was less impressive, coming in at $6.35 billion at the midpoint, being 1.35% below analyst estimates. Applied Materials made a GAAP profit of $1.79 billion, improving on its profit of $1.13 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) Q1 FY2022 Highlights:

  • Revenue: $6.27 billion vs analyst estimates of $6.16 billion (1.8% beat)
  • EPS (non-GAAP): $1.89 vs analyst estimates of $1.85 (1.89% beat)
  • Revenue guidance for Q2 2022 is $6.35 billion at the midpoint, below analyst estimates of $6.43 billion
  • Free cash flow of $2.51 billion, up 166% from previous quarter
  • Inventory Days Outstanding: 124, up from 123 previous quarter
  • Gross Margin (GAAP): 47.1%, up from 45.7% same quarter last year

“While the supply environment remains challenging, Applied Materials is doing everything we can to deliver for our customers and we recorded our highest-ever quarterly revenues,” 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 mediocre, averaging 15.9% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $5.16 billion to $6.27 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

This was a decent quarter for Applied Materials as revenues grew 21.4%, topping analyst estimates by 1.8%. This marks 9 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 continue, and is guiding for revenue to grow 13.7% YoY next quarter, and Wall St analysts are estimating growth 13.5% 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 124, 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 Q1 Results

Sporting a market capitalization of $124 billion, more than $5.73 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.

It was good to see Applied Materials improve their 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. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company is up 3.02% on the results and currently trades at $145 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.