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Stock Analyst Update

Applied Materials' Forest Is Still Green

A few trees shouldn't hide the company's true outlook.

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What Happened?
Wednesday evening, Applied Materials (AMAT) reported fourth-quarter profits of $0.77 per share, a penny higher than First Call's average earnings estimate. The results included improved margins as well as revenue growth of 7% over the prior quarter and 81% compared with the same quarter last year. On a more sober note, management said current-quarter bookings could decline from the previous quarter, which indicates the pace of new orders in the sector is slowing.

What It Means for Investors
We caution investors not to miss the forest for the trees. The market appears to be overly pessimistic on the chip and chip equipment industries, and we would stay the course with bellwethers such as Applied Materials. True, the slowdown in future bookings is a concern, and the outlook for capital spending in 2001 is less than certain. Demand in the computer industry has slowed, so memory prices have remained low and supplies have not become constrained, as expected. This could lead to lower-than-expected spending on chip equipment next year if PC demand does not rebound. A temporary slowdown in demand for wireless chip components and a fear of slowing demand for telecom equipment have added to the uncertainty.

Jeremy Lopez does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.