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Bear of the Day: Applied Materials (AMAT)

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Applied Materials (AMAT - Free Report) , a major WFE (wafer fabrication equpiment) provider to semiconductor manufacturers like Intel, NVIDIA (NVDA - Free Report) , and Samsung reported Q2 non-GAAP earnings in late May of $1.85 per share, which improved 13% year over year.

However, the figure missed the Zacks Consensus Estimate by 2.1%.

Net sales of $6.25 billion climbed 12% from the year-ago period's level. But the figure lagged the Zacks Consensus Estimate of $6.35 billion.

These slight disappointments, plus subdued forward guidance, prompted analysts to lower revenue and profit estimates for the full year, thus pushing AMAT into the cellar of the Zacks Rank.

Since the company's May 19 report (for a fiscal year that ends in October), EPS projections have dropped 7.2% from $8.06 to $7.48.

And next year's EPS was dunked over 9% from $9.60 to $8.70. Much of this has to do with the global pressure from supply chain issues that may actually be resolving soon.

I profiled the dilemma for Semiconductor investors in this week's video where I broke down the 4 major industry players and why the Electronic Design Automation (EDA) duopoly of Synopsys (SNPS - Free Report) and Cadence Design Systems (CDNS - Free Report) were signaling that the Semi bear market may be over soon.

AMAT Quarter Details

Top-line growth was driven by the strong performance delivered by the Semiconductor Systems and Applied Global Services segments.

The company witnessed solid growth in geographies, namely the United States, Europe, Taiwan, Southeast Asia and China, which was another positive.

Although the company witnessed strengthening demand for semiconductors, global supply-chain constraints remained its major headwind.

Nevertheless, management remains optimistic about the growing demand for semiconductor and wafer fab equipment. Further, the growing momentum in foundry/logic, and equipment markets remains a positive.

AMAT Segments in Detail

Semiconductor Systems generated $4.46 billion of sales (which contributed 71.4% to its net sales), reflecting a year-over-year increase of 12%. A solid demand environment and strong orders contributed well.

However, the pandemic-led supply-chain disruptions were negatives.

Applied Global Services reported sales of $1.38 billion (22.1% of net sales), which rose 15% from the prior-year quarter’s level. Growth of 11% in systems under subscription agreement contributed well amid the supply-chain issues.

Sales from Display and Adjacent Markets were $381 million (6.1% of net sales), up 2% from the year-ago level.

AMAT Revenues by Geography

The United States, Europe, Japan, Korea, Taiwan, Southeast Asia and China generated sales of $702 million, $489 million, $407 million, $968 million, $1.41 billion, $138 million and $2.13 billion, each contributing 11%, 8%, 6%, 16%, 23%, 2% and 34% to net sales, respectively.

On a year-over-year basis, sales in the United States, Europe, Taiwan, Southeast Asia and China increased 43.6%, 113.5%, 35.3%, 26.6% and 15.7%, respectively. Sales in Japan and Korea fell 7.9% and 32.2% from the year-ago quarter.

AMAT Operating Results

The non-GAAP gross margin was 47%, contracting 70 basis points (bps) from the year-ago quarter’s level.

Operating expenses were $1.03 billion, down 3.8% from the year-ago quarter’s level. As a percentage of sales, the figure contracted 270 bps year over year to 16.5%.

The non-GAAP operating margin of 30.6% for the reported quarter contracted 110 bps from the prior-year period’s level.

AMAT Balance Sheet & Cash Flow

As of May 1, 2022, cash and cash equivalent balance, and short-term investments were $3.9 billion compared with $5.7 billion as of Jan 30, 2022.

Inventories were $5.01 billion in second-quarter fiscal 2022 compared with $4.5 billion in first-quarter fiscal 2022. Accounts receivables increased to $4.9 billion in the reported quarter from $4.4 billion in the previous quarter.

Long-term debt was $5.455 billion at the end of the reported quarter compared with $5.454 billion at the end of the previous quarter.

Applied Materials generated a cash flow of $415 million, significantly down from $2.7 billion in the prior quarter.

AMAT returned $2.01 billion to its shareholders, of which share repurchases were worth $1.8 billion and dividend payments were worth $211 million.

AMAT Guidance

For third-quarter fiscal 2022, Applied Materials expects net sales of $6.25 billion (+/-$400 million). The Zacks Consensus Estimate for the same is pegged at $6.68 billion.

The company anticipates Semiconductor Systems, AGS and Display revenues of $4.48 billion, $1.43 billion and $310 million, respectively.

Management expects non-GAAP earnings per share of $1.59-$1.95. The Zacks Consensus Estimate for the same is pegged at $2.04.

Applied Materials expects a non-GAAP gross margin of 46% and non-GAAP operating expenses of $1.06 billion. It projects a non-GAAP tax rate of 12%.

Bottom-line on AMAT: The WFE companies are seeing a slight slow-down in equipment orders. But given the Tech Super Cycle will persist through this decade of AI, buying AMAT soon will become a smart investment. The Zacks Rank will confirm when it's time to buy.

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