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Why Is Applied Materials (AMAT) Down 15.5% Since Last Earnings Report?

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It has been about a month since the last earnings report for Applied Materials (AMAT - Free Report) . Shares have lost about 15.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Applied Materials due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Applied Materials Q3 Earnings & Sales Beat Estimates

Applied Materials Inc. reported fiscal third-quarter 2020 non-GAAP earnings of $1.06 per share, which surpassed the Zacks Consensus Estimate of $0.95. Moreover, the figure increased 19.1% sequentially and 43% year over year.

Net sales of $4.40 billion surpassed the Zacks Consensus Estimate by 4.7%. Also, the figure improved 23% from the year-ago period.

The company witnessed solid momentum in key geographies, namely Europe, Korea, Taiwan and China.

Its demand for equipment and services remained strong in the quarter.

During the quarter, the company won critical new applications in advanced patterning, in turn strengthening its position in the foundry market. Management believes that demand for foundry logic is expected to remain strong in the near term, thanks to the rising need for specialty nodes in automotive, power, 5G rollout, IoT, communications and image sensor markets.

In addition, the company expects DRAM spending to improve in the near term.

Let’s delve deeper into the numbers.

Segments in Detail

The Semiconductor Systems Group generated $2.9 billion sales (which contributed 66% to its net sales), reflecting an increase of 28.3% year over year.

Applied Global Services reported sales of $1.03 billion (24% of net sales), which increased 11.1% from the prior-year quarter.

Sales from Display and Adjacent Markets came in at $425 million (10% of net sales), up 25.4% from the year-ago level.

Revenues by Geography

The United States, Europe, Japan, Korea, Taiwan, Southeast Asia and China generated sales of $399 million, $196 million, $472 million, $1.05 billion, $687 million, $120 million and $1.47 billion, contributing 9%, 5%, 11%, 24%, 16%, 2% and 33% to net sales, respectively.

On a year-over-year basis, sales in Europe, Korea, Taiwan and China increased, while sales in the United States, Japan and Southeast Asia decreased.

Operating Results

Non-GAAP gross margin was 45%, expanding 100 basis points (bps) from the year-ago quarter.

Operating expenses were $847 million, 12.2% higher than the year-ago quarter. As a percentage of sales, research, development and engineering, as well as marketing and selling expenses decreased, while general and administrative costs increased.

Non-GAAP operating margin of 26.4% for the reported quarter expanded 340 bps from the prior-year period.

Balance Sheet & Cash Flow

At fiscal third quarter-end, cash and cash equivalent balance, and short term investments were $4.8 billion compared with $5.7 billion at fiscal second quarter-end.

Inventories were $3.95 billion versus $3.73 billion in the fiscal second quarter. Accounts receivables increased to $2.81 billion from $2.63 billion in the fiscal second quarter.

The company returned $200 million and $202 million through stock repurchases and cash dividends, respectively.

Applied Materials generated cash flow of $867 million, up from $635 million in the fiscal second quarter.

Guidance

For fourth-quarter fiscal 2020, Applied Materials expects net sales to be $4.60 (+/-$200 million).

Non-GAAP EPS is expected in the range of $1.11-$1.23.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision. The consensus estimate has shifted 14.3% due to these changes.

VGM Scores

At this time, Applied Materials has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Applied Materials has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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