We're Trimming Our Price Target on This Two-Rated Tech Holding
Were's what we’ll need to see to become more bullish on the shares.
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Last night semiconductor capital equipment company Applied Materials AMAT reported January-quarter results that topped consensus EPS forecasts on record revenue that was modestly ahead of expectations. However, the shares are trading off Friday morning, following headlines its April-quarter guidance came up short.
When we look at the formal guidance, which calls for EPS of $2.30 plus or minus $0.18, and revenue of $7.1 billion plus or minus $400 million, the math tells us those are ranges between $2.12-$2.48 and $6.7 billion-$7.5 billion, respectively. The market was looking for EPS of $2.29 on revenue of $7.2 billion.
Looking at past forecasts from Applied, its modus operandi is to give banded top and bottom-line guidance, so this is nothing out of the ordinary, but we will concede the revenue guidance range for the current quarter skews a tad to the lower end compared to the upper band. That stems from December and January export controls to China that leave Applied facing a $400 million headwind, half of which will be felt in the current quarter. Because those export controls are only for leading-edge technologies, Applied continues to sell older (and approved) technologies into China. Netting it out, China is expected to dip to a 25% customer in the current quarter compared to the 30% average it has been.
On a positive note, Applied’s April-quarter guidance is for the adjusted gross margin to be 48.4%, up from 47.5% in the year-ago quarter. We know the overall mix of equipment sales can influence Applied’s margins, just like any other equipment company, but tracing back the last few quarters we see a steady lift in its adjusted gross margin. We chalk that up to a combination of pricing and management’s ongoing cost reduction efforts, but lower sales to China translate into somewhat sequentially lower margins at least for the next quarter or two.
While we reduced our AMAT price target several months ago, we will make another trim today to reflect marginally slower growth prospects in the very near term. We are lowering our target to $205 from $210.
We continue to see the AI and data center spending ramp and growing AI adoption in other devices driving demand for new semi-cap equipment in the coming quarters and next few years. That should translate into a re-acceleration of growth inside Applied, but since we are not in the business of hoping for things to unfold, we will stick with our Two rating for now. Granted, the post-earnings reaction in the market means we will see a large enough upside percentage to warrant something stronger than a Two rating, but we’ll look to revisit it as Applied confirms this near-term patch of slower growth is over.
Until that time, we could see AMAT once again trading in a relatively tight range like we’ve seen at various points over the last six months. Potentially helping keep AMAT shares in a trading range are indications President Trump is revisiting certain aspects of the US Chips and Science Act 2022 (CHIPs Act). So far that appears to be the mandated use of unionized labor for factory construction as well as “certain conditions that do not align with President Trump’s executive orders and policies.” For the time being, this is another reason to maintain our Two rating on AMAT.
At the time of publication, TheStreet Pro Portfolio was long AMAT.
