What Happened:
Shares of maker of machinery employed in semiconductor manufacturing, Applied Materials (NASDAQ:AMAT) jumped 13% in the morning session after the company reported fourth-quarter results that exceeded analysts' revenue and EPS expectations, which is especially impressive given how many semis companies missed and talked about macro headwinds this earnings season. Free cash flow also improved significantly from the previous quarter. Revenue guidance for the next quarter also came in ahead of consensus.
Management highlighted some of the drivers of the strong outlook. Firstly, the AGS (applied global services) segment, which grew 8% during the quarter and stands at a $6 billion annual run rate, has the potential to achieve double-digit growth in the coming quarters. Also, the DRAM business continued to contribute strongly to the semiconductor systems segment as the company continued to gain market share. Underpinning the company's growth thesis for the coming quarters are three broad assumptions. 1.) A semiconductor market growing faster than GDP 2.) An equipment market growing even faster than the semiconductor market 3.) AMAT's equipment business outgrowing the market.
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What is the market telling us:
Applied Materials's shares are quite volatile and over the last year have had 6 moves greater than 5%. But moves this big are very rare even for Applied Materials and that is indicating to us that this news had a significant impact on the market's perception of the business.
The biggest move we wrote about over the last year was 3 months ago, when the company dropped 6.4% on the news that 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 provided cautionary outlooks. Overall, we think this was a strong quarter that should satisfy shareholders.
Applied Materials is up 31.9% since the beginning of the year. Investors who bought $1,000 worth of Applied Materials's shares 5 years ago would now be looking at an investment worth $5,181.
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