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Which Factors Would Drive Applied Materials’ Fiscal 3Q16 Earnings?

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May. 27 2016, Updated 3:06 p.m. ET

Fiscal 3Q16 guidance

For fiscal 3Q16, Applied Materials (AMAT) expects to report revenue in the range of $2.79 billion–$2.89 billion, up 14% to 18% YoY (year-over-year) and higher than the analyst estimate of ~$2.5 billion. The company expects revenue to be driven by its Display segment, wherein sales are expected to rise by 70%–90% YoY to ~$300 million in fiscal 3Q16.

Another segment that is expected to drive the company’s revenue is Silicon Systems, wherein net sales are expected to grow by 10%–15% YoY. Sales from the Services segment are expected to grow by 5%–8% YoY, and revenue from Energy and Environmental Solutions is expected to remain flat.

Which Factors Would Drive Applied Materials’ Fiscal 3Q16 Earnings?

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Expenses

Revenue projections show that the company is increasing its share in existing markets and expanding its addressable markets. Responding to customer demand for new technologies, AMAT is increasing its R&D (research and development) expenses to develop new disruptive products, especially in the Display segment. But it plans to continue to control its other expenses to increase profitability. The company’s operating expense is expected to be around $585 million in fiscal 3Q16.

Notably, the Semiconductor ETF (SMH) has exposure to 26 semiconductor stocks, including ~4.7% exposure to AMAT.

Profitability

AMAT expects to report non-GAAP (generally accepted accounting principles) EPS (earnings per share) between $0.46 and $0.50, which would be up by 45.5% YoY and higher than the analyst estimate of $0.36.

AMAT’s strong guidance is based on its customers’ investments in device technology. Even TSMC (TSM) reported strong guidance based on new flagship product launches by its customers NVIDIA (NVDA) and Apple (AAPL). These companies at the top of the supply chain are considered indicators in the overall chip industry.

Now let’s look at the industry forecast.

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