Applied Materials’ Q2 Guidance Signals Semiconductor Weakness

Applied Materials stock falls on weak guidance

As we approach the end of the earnings season, we can see the widespread impact of the US-China trade war on the semiconductor industry.

On February 14, in after-hours trading, Applied Materials (AMAT) stock fell 2% as its fiscal 2019 second-quarter guidance missed analysts’ estimates, indicating weakness in chip makers’ spending as they wait for inventory stockpiles resulting from weak demand to clear.

Applied Materials’ Q2 Guidance Signals Semiconductor Weakness

Applied Materials supplies equipment and machinery, which chip makers have to buy in advance, as it takes AMAT a significant amount of time and money to build and install the equipment. Hence, chip makers may delay their orders to cut costs. As AMAT’s customer list includes foundries such as Intel and TSMC and memory chip makers such as Micron and Samsung, its earnings are used to forecast semiconductor industry earnings.

AMAT’s fiscal 2019 first-quarter earnings highlights

In the first quarter of fiscal 2019, AMAT’s revenue fell 11% YoY (year-over-year) to $3.75 billion, beating analysts’ estimate of $3.71 billion. The company’s revenue from the semiconductor business fell 20.5% YoY, which more than offset the 9% YoY growth it saw from services and the 14.5% YoY growth it saw from its display category. Its non-generally accepted accounting principles EPS fell 24% YoY to $0.81, beating analysts’ estimate of $0.79.

On AMAT’s fiscal 2019 first-quarter earnings call, its CEO, Gary Dickerson, stated that there were more negatives than positives in the industry, and this was visible in its fiscal 2019 second-quarter outlook.

AMAT’s fiscal 2019 second-quarter outlook

For the second quarter of fiscal 2019, AMAT expects its revenue to fall 24% YoY to $3.48 billion, missing analysts’ estimate of $3.66 billion. Its YoY revenue decline is expected to be greater than rivals Lam Research’s (LRCX) and KLA’s (KLAC) revenue declines of 17% and 10%, respectively, in the March 2019 quarter. AMAT’s non-GAAP EPS guidance of $0.66 at the midpoint is also lower than analysts’ estimate of $0.76.

AMAT expects wafer fabrication equipment spending, especially from memory chip makers, to fall in fiscal 2019. It also expects its display equipment revenue to fall 33% YoY in fiscal 2019, indicating weakness in the smartphone space. Analysts expect AMAT’s fiscal 2019 revenue to fall more than 10% YoY.

Such weak guidance will likely pull AMAT down on February 15.