Lagging-Edge Equipment Demand Helps Applied Materials Overcome Q1 Industry Headwinds

Wide-moat Applied Materials reported fiscal first-quarter revenue above the midpoint of the firm’s guidance, thanks to strength in its lagging-edge logic and foundry tools for Internet of Things, communication, automotive, power management, and sensors applications, or ICAPS. Management expects its ICAPS sales to offset weaker memory spending during its fiscal second quarter as well. We maintain our view that the wafer fab equipment market will be down 22% in 2023 primarily due to weaker memory spending, but Applied’s greater exposure to 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 fairly valued following the recent run-up in the stock (up 54% since mid-October).

First-quarter sales grew 7% year over year to $6.74 billion. Revenue in the semiconductor systems group, or SSG, grew 13% year over year to a record $5.16 billion. Within SSG, equipment sales to logic and foundry customers grew 45% year over year. Notably, Applied’s sales to China fell 42% year over year to $1.15 billion, which we attribute to the U.S. government export restrictions. We suspect most of the reduction affected Applied’s equipment sales to Chinese memory and advanced foundry customers. In the future, 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 35% year over year, led by weakness in DRAM. Quarterly services revenue was $1.37 billion and was up 4% year over year.

Management expects second-quarter sales to be at a midpoint of $6.4 billion, with SSG at $4.84 billion, services at $1.34 billion, and display at $160 million.