Applied Materials: Cracks In The Chip Recovery Or Time To Buy?

Applied Materials NASDAQ: NYSE shares fell following the FQ2 earnings report, but this is not the time to sell. The report may not have sparked a rally, but it does not suggest lower prices are on the way. Applied Materials' business outlook is stable, with a chance of outperforming the industry this year and next. The shift to AI drives demand for next-gen technology on a broad basis and for  Applied Materials, Foundry & Logic equipment and services.

The takeaways from the report are that top and bottom line results outpaced the consensus estimate, and guidance was raised, so the mid-point is above the analysts' consensus, which is good enough for now. 

The analysts see Applied Materials in a good position due to its focus on ICAPS and specialty chips. ICAP is IoT, communications, automotive, and Power/Sensors; all are seeing solid demand. The community is not gushing over the results, but they did spark several price target adjustments.

Nine have shown up on Marketbeat’s analyst tracking page, including 1 price target reduction and 8 increases, most above consensus. The consensus estimate is trending higher than last month and last quarter, and the stock is on track to set a new 1-year high because of it. 

Applied Materials Beats And Raises 

Applied Materials beat and raised its guidance, which should have boosted higher prices; most analysts think so. The company reported $6.63 billion in revenue for a gain of 6.1% compared to last year, beating the consensus by 400 basis points. The strength was centered in the Foundry & Logic business, which grew by 84% compared to the 11% growth in DRAM. Applied Global Services is the bulk of the business and is up YOY, while Display and Adjacent Markets were down. 

The company reported a slight decline in operating margin, 150 basis points GAAP and adjusted, but even this was less than expected. The adjusted EPS of $2.00 came in $0.17 above consensus or 920 basis points compared to the 400 bps of top-line strength. This led to an increase in guidance for Q2 that puts the mid-point of revenue and earnings well above target. Some may have expected more, but this is a good read, given the broad economic uncertainty gripping the market today. 

Applied Materials Is Worth Owning For Capital Returns 

Applied Materials isn’t a high-yielding stock, but the 1.0% yield is reliable and expected to grow. The company reported $2.29 billion in cash flow for the quarter and paid a mere $0.219 in the form of dividends, which leaves ample room for reinvestment and share repurchases. The company repurchased $0.8 billion during Q2, about 0.7% of the market cap, and repurchases can be expected to continue through the end of the year and into next year. Annualized repurchases are with 2.8% to investors and are helping to support the price action. 

The institutions also help to support the price action. They’ve been buying on balance for 3 consecutive quarters, and the activity ramped up in Q1 and Q2 2023. If this continues, the price of the stock will move higher, and the post-release dip in price action could be the trigger that gets the institutions to buy more. As it is, Applied Materials price action has been capped at the $130 level and may become range bound.