Can Applied Materials Maintain High Profit Margins in 2019?

Applied Materials’ profit margins 

Previously, we saw that Applied Materials’ (AMAT) revenue growth rate is likely to underperform that of rivals KLA (KLAC) and Lam Research (LRCX). A similar performance is expected on the profitability front. AMAT’s profitability is similar to LRCX’s, as the companies have many product overlaps in deposition and etching. However, AMAT has a broader portfolio.

AMAT’s and LRCX’s profitability is lower than that of KLAC, which does not have a broader portfolio that reduces its operating expense. Moreover, KLAC, like AMAT, enjoys strong cash flows from the service business.

Can Applied Materials Maintain High Profit Margins in 2019?

Gross margin

Over the last two years, AMAT has maintained its non-GAAP (generally accepted accounting principles) gross margin above 45% as it enjoyed strong revenue growth. However, this trend could break and gross margin could fall below 45% in the fiscal 2019 first quarter as its revenue falls. Even LRCX’s gross margin fell ten basis points sequentially to 46.3%, and KLAC’s gross margin fell 160 basis points sequentially to 63.5% in the December 2018 quarter.

Operating margin

Over the last two years, AMAT has maintained its non-GAAP operating margin above 25% as the benefits of higher gross margin trickled down. It remains to be seen if the company can maintain its quarterly operating margin above 25% in fiscal 2019. Rival LRCX’s operating margin rose 180 basis points sequentially to 28.9%, and KLAC’s margin fell 200 basis points sequentially to 39.1% in the December 2018 quarter.

EPS

AMAT expects its fiscal 2019 first-quarter non-GAAP EPS to slide 19% sequentially to $0.79 in line with the analyst estimate of $0.79. This would mark its first YoY EPS decline in ten quarters. For full-year 2019, analysts expect AMAT’s EPS to fall 23.4% YoY to $3.41. However, analysts expect AMAT’s EPS to rebound to $4.37% in 2020, representing YoY growth of 28%.

Next, we will look at AMAT’s operating efficiency.

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