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.
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.
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.
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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