Applied Materials's (NASDAQ:AMAT) Q3 Sales Top Estimates, Provides Encouraging Quarterly Guidance

Kayode Omotosho /
2022/08/18 4:36 pm EDT

Maker of machinery employed in semiconductor manufacturing, Applied Materials (NASDAQ:AMAT) reported Q3 FY2022 results beating Wall St's expectations, with revenue up 5.22% year on year to $6.52 billion. Guidance for next quarter's revenue was $6.65 billion at the midpoint, which is 1.6% above the analyst consensus. Applied Materials made a GAAP profit of $1.6 billion, down on its profit of $1.71 billion, in the same quarter last year.

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Applied Materials (AMAT) Q3 FY2022 Highlights:

  • Revenue: $6.52 billion vs analyst estimates of $6.26 billion (4.01% beat)
  • EPS (non-GAAP): $1.94 vs analyst estimates of $1.79 (8.65% beat)
  • Revenue guidance for Q4 2022 is $6.65 billion at the midpoint, above analyst estimates of $6.54 billion
  • Free cash flow of $1.25 billion, up from $205 million in previous quarter
  • Inventory Days Outstanding: 143, up from 137 previous quarter
  • Gross Margin (GAAP): 46.1%, down from 47.8% same quarter last year

“Applied Materials delivered record quarterly revenue, yet ongoing supply chain challenges constrained our ability to meet demand, and our top priority remains increasing shipments to our customers,” 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 strong, averaging 20.5% annually. But as you can see below, last year has not been especially strong, with quarterly revenue growing from $6.19 billion to $6.52 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

While Applied Materials beat analysts' revenue estimates, this was a very slow quarter with just 5.22% revenue growth. This was the third straight quarter of decelerating growth for Applied Materials, potentially indicating a coming cycle downturn.

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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 143, 3 days above the five year average, suggesting that inventory has grown to a level slightly above the long term average.

Key Takeaways from Applied Materials's Q3 Results

With a market capitalization of $92.2 billion, more than $3.54 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 and revenue expectations this quarter. On the other hand, revenue growth was quite weak and gross margin deteriorated a little. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company is up 2.77% on the results and currently trades at $111.35 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.