Why We're Maintaining Our Rating on This Semi-Cap Holding (original) (raw)

*Shares of Applied Materials are trading off after reporting better-than-expected quarterly results

*Like other companies, Applied only lifted its outlook to bookend consensus expectations

*We have yet to see the impact of CHIPs Act spending on the company’s revenue stream

*While we like the long-term prospects, here’s where we would likely be buyers of more AMAT shares

*Applied management adds support for our position in Universal Display

Following the July quarter earnings beat by Applied Materials (AMAT) on Thursday night, we are reiterating our $240 price target on the shares.

Despite the beat, like many other companies that have recently reported, Applied’s forward guidance only bookended consensus expectations. So far, that’s leading to more aggressive Wall Street price targets to be revised lower to 250to250 to 250to260 or so from 275to275 to 275to280 and odds are we will see more price target movement later on Friday and early next week.

Following the rebound in AMAT shares to over 210from210 from 210from175, we’re not going to chase the shares, especially as they contend with technical resistance near $215. Rather, we’ll continue to watch the shares, and should they fall closer to the next layer of support, which is the 200-day moving average, it would be a good level to pick up more AMAT shares.

During the quarter, Applied posted some nice margin improvement with gross margins coming in at 47.4%, up a full percentage point on a rather modest 5% year-over-year revenue increase. Granted, revenue for the quarter of $6.78 billion was a record for the quarter, but what we didn’t see was any real growth in the company’s U.S. business. Year over year, that business rose just over 1%, which tells us Applied has yet to see the benefit of the U.S. CHIPs Act spending program. As that program comes on stream, we could see further margin improvement but the odds of its gapping significantly higher are limited.

While we wait for that to kick in, Applied’s semi-cap business from incremental chip capacity capital spending became tied to several applications, including smartphones, PC, IoT, EVs and, of course, AI. No surprise that there was a big call out by management during the earning call, and we continue to see that amalgamation of factors driving chip industry shipments higher, tightening semiconductor fab. capacity in the process. We are also seeing meaningful share shifts, with Intel (INTC) continuing to lose out and that is leading to lower capital spending this year by the company than previously expected.

For this year, Intel now targets net capital spending between 11billionto11 billion to 11billionto13 billion, down 20% from its initial forecast. The company, as of now, expects its net capital spending to rebound next year to 12billionto12 billion to 12billionto14 billion, but color us cautious. Should Intel continue to lose out to Nvidia (NVDA) , AMD (AMD) , Marvell (MRVL) and Qualcomm (QCOM) , we could see further declines in its capital spending.

However, that share shift means we will need to monitor capital spending plans at Taiwan Semiconductor (TSM) even more closely for 2H 2024 and beyond. Applied counts TSM as its largest customer (19% of 2023 sales) with Samsung at close second (15% of sales) and Intel less than a 10% customer. During Samsung’s June quarter earnings call, management’s Foundry business target for a fourfold increase in its customer base and a ninefold increase in sales by 2028 compared to 2023 suggests it is out to eat Intel’s lunch. Those targets imply Samsung will continue to be a big spender on semi-cap equipment, and that should benefit Applied.

Applied, Organic Light-Emitting Diodes and Universal Display

Outside of semi-cap equipment (Applied’s bread-and-butter business), management made the following earnings call comment that supports our bullish stance on Universal Display ( (OLED) ) shares: “While LCD equipment spending remains low, we are becoming more confident that the OLED technology found in smartphones will be adopted in notebook PCs and tablets whose larger screen sizes will require a significant increase in capital investments.”

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At the time of publication, TheStreet Pro Portfolio was long AMAT, NVDA, MRVL and QCOM.