Applied Materials Earnings: Services and Industrial Markets Drove Good Results, but Shares Look Rich

We maintain our $110 fair value estimate for wide-moat Applied Materials AMAT after good fiscal third-quarter results. Sales in the quarter, as well as guidance for the fiscal fourth quarter, exceeded our model, but our long-term forecast is intact. Applied is enjoying good demand for its trailing-edge products, which is helping to offset weakness in the mobile and personal computer markets. Similar to peers like KLA and Lam that have already reported, Applied’s services business is also a good buoy to sales. A severe downcycle in memory chips is still weighing on results, but DRAM sales are faring much better than for flash. All in, we continue to view Applied as well-positioned to capitalize on long-term secular trends toward the Internet of Things, and advances in cutting-edge chips for applications like artificial intelligence, or AI. Nevertheless, we continue to find valuation challenging and see shares as overvalued.

Fiscal third-quarter sales declined 1% year over year and 3% sequentially to $6.425 billion, which was still well ahead of our expectations. DRAM sales rose about 45% sequentially, benefiting in part from greater sales of trailing-edge equipment to Chinese customers as they build up demand due to fear of further trade restrictions between the U.S. and China. NAND sales declined steeply as that market continues to struggle. Logic and foundry sales were a mixed bag, declining about 12% sequentially but rising about 18% year over year. Applied’s trailing-edge sales into automotive and industrial markets were strong, and made up over half of total logic and foundry revenue. GAAP gross margin was solid in the quarter, dipping 40 basis points sequentially but topping management guidance due to a good mix of services and trailing-edge sales.