What Happened:
Shares of maker of machinery employed in semiconductor manufacturing, Applied Materials (NASDAQ:AMAT) fell 6.4% in the after-market session after Reuters reported that the company is under U.S. criminal investigation for allegedly evading export restrictions on China's leading chipmaker, SMIC (Semiconductor Manufacturing International Corporation). The report noted that the Justice Department is probing claims that AMAT sent equipment to SMIC via South Korea without proper licenses. The investigation centers on shipments made after SMIC's inclusion in the "Entity List" in December 2020, amid U.S. restrictions on chip exports to China for national security. While AMAT is cooperating and no charges have been confirmed, the uncertainty likely led to the share drop, reflecting investor concerns about potential impacts on the company's operations and reputation.
Separately, Applied Materials reported third quarter earnings that blew past analysts' EPS expectations. Revenue outperformed Wall Street's estimates, driven by strong results in all three of its reportable segments (semiconductor systems, applied global services, and display and adjacent markets). Looking ahead, the company provided revenue and EPS guidance for next quarter that beat analysts' estimates - especially during a time when many semiconductor companies are providing cautionary outlooks. Overall, we think this was a strong quarter that should satisfy shareholders.
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What is the market telling us:
Applied Materials's shares are quite volatile and over the last year have had 8 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The biggest move we wrote about over the last year was 6 months ago, when the company gained 5.2% on the news that competitor, Nvidia, delivered an exceptional quarter that topped analysts' estimates across key metrics. Revenue surpassed expectations by an impressive 10.3%, driven by a record-breaking data center revenue of $4.28 billion. Notably, the company exhibited improved profitability, with both gross margin and operating margin outperforming expectations. Earnings per share beat by an impressive 18.8%. Inventory levels experienced a meaningful decrease during the quarter. In addition to the outstanding quarterly results, the revenue guidance for the next quarter surpassed expectations by over 50%. Similarly, the operating profit guidance exceeded Consensus estimates. Founder and CEO Jensen Huang emphasized the ongoing transformations in the computer industry, particularly the advancements in accelerated computing and generative AI. He highlighted Nvidia's readiness to seize the opportunities presented by the anticipated trillion-dollar shift in global data center infrastructure from general-purpose to accelerated computing, as firms implement generative AI into their business operations. Overall, the company's blowout quarter, with its impressive revenue growth, enhanced profitability, and positive guidance, underscored its strength in the market. Applied Materials is a semiconductor company, and considered a peer of Nvidia.
Applied Materials is up 53.1% since the beginning of the year, and at $147.65 per share it is trading close to its 52-week high of $155.37 from November 2023. Investors who bought $1,000 worth of Applied Materials's shares 5 years ago would now be looking at an investment worth $4,303.
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