Applied Materials Earnings: Lagging-Edge Logic Demand Instrumental in Offsetting Memory Softness

Wide-moat Applied Materials AMAT reported fiscal second-quarter revenue above the midpoint of the firm’s guidance, thanks to strength in tools for Internet of Things, communication, automotive, power management, and sensors applications, or ICAPS. Robust demand for the firm’s ion implantation tools is being driven by investments in silicon carbide manufacturing to support the proliferation of electric vehicles. Management expects its ICAPS sales to offset weaker memory spending during its fiscal third quarter as well. We maintain our view that the wafer fab equipment market will be down over 20% in 2023 primarily due to weaker memory spending, but Applied’s greater exposure to overall logic and foundry customers should allow it to outperform the industry in 2023. Our fair value estimate remains $110 per share for Applied, and we view shares as modestly overvalued following the recent run-up in the stock (up 38% year to date).

Second-quarter sales grew 6% year over year to $6.6 billion. Revenue in the semiconductor systems group, or SSG, grew 12% year over year to $5 billion. Within SSG, equipment sales to logic and foundry customers grew 44% year over year. Notably, Applied’s sales to China fell 34% year over year to $1.4 billion, which we attribute to the U.S. government export restrictions. We suspect most of the reduction impacted Applied’s equipment sales to Chinese memory and advanced foundry customers. Going forward, we expect most of the firm’s revenue to China to be for mature logic and foundry processes supporting ICAPS markets. Memory SSG sales fell 49% year over year. We think memory demand will remain tepid in the coming quarters. Quarterly services revenue was $1.4 billion and was up 3% year over year.

Management expects third-quarter sales to be at a midpoint of $6.15 billion, plus or minus $400 million, with SSG at $4.5 billion, services at $1.4 billion, and display at $170 million.