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Semiconductor Downturn to End AMAT’s Revenue Growth Trend

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Applied Materials’ revenue

Applied Materials (AMAT) earns revenue by selling manufacturing equipment for semiconductors and providing maintenance and other services. The semiconductor industry is cyclical in nature and so is Applied Materials. The company has been reporting strong double-digit YoY revenue growth for over two years driven by strength in the semiconductor industry, especially the memory market.

As the above graph shows, AMAT’s revenue growth was higher than KLA’s (KLAC) but lower than Lam Research’s (LRCX) over the last two years. LRCX enjoyed strong growth because it earns ~80% of its revenue from the memory market, whereas KLAC and AMAT earn ~60% and ~40% of revenues from memory, respectively.

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However, this growth trend is likely to end as the semiconductor industry faces demand slowdown amid a weak macroeconomic environment. Applied Materials expects its fiscal 2019 first-quarter revenue to fall 13% YoY to $3.65 billion at the midpoint, whereas analysts expect AMAT to report revenue of $3.72 billion, down 11% YoY. The revenue decline will likely come as memory chipmakers cut their capital spending to reduce supply.

The fiscal 2019 first quarter will likely mark the end of AMAT’s ten-quarter YoY growth trend. The company will also likely underperform KLAC and LRCX, which reported YoY revenue growth of 15% and -2%, respectively, in the December 2018 quarter.

Applied Materials’ long-term outlook is strong

At the 2017 Analyst Day, AMAT listed five long-term growth opportunities for the company: 3D NAND (negative AND) flash, foundry, lithography patterning, display, and China’s (FXI) efforts to boost semiconductor manufacturing. The US-China trade war, smartphone weakness, and memory market oversupply have temporarily slowed three of the five growth opportunities.

Analysts expect AMAT’s full-year 2019 revenue to fall 11.5% YoY to $15.27 billion due to weak demand from memory chipmakers and China. However, they expect AMAT’s growth to rebound in 2020 with revenue of $17.05 billion, up 11.7% YoY. Even though the current environment is tough, AMAT’s long-term growth prospects are bright, as advanced technologies are material intensive.

Next, we’ll look at AMAT’s profitability.

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